Regaining energy?

Big moves, as longtime traders know, are often reversed, in part or in full. Markets overshoot all the time, especially when confronted by unexpected events. But that doesn’t mean they always reverse—at least not right away.

CenterPoint Energy (CNP) fell 6.7% on Monday—its biggest down day in nearly two years—after Texas Governor Greg Abbott called for an investigation into the Texas utility amid ongoing power outages in the wake of Hurricane Beryl:¹

The sell-off dropped shares to their lowest level since mid-April, and CNP put options volume was among the day’s heaviest. But after shares rallied nearly 2% Tuesday morning, it looked like the setback could be short lived. After all, Monday’s drop represented a pullback to notable technical level—the breakout point of the stock’s January-April trading range—and Tuesday may have appeared to represent a successful test of that level.

Historically, though, that hasn’t necessarily been CNP’s path after big down days like Monday. In fact, the stock usually performed better in the short term when it closed lower the day after a big down day, not higher. For example, since 1966, CNP has closed down 5% or more 93 other times. It closed higher the next day 57 times and lower 36 times. Here are the stock’s median returns one, five, and 10 trading days later:²

At each interval, the stock’s returns were better when it closed lower the day after the big down day (green bars).

There are many factors that could contribute to this counterintuitive result, but one hypothesis has to do with the nature of the sell-off catalyst: The types of events that trigger moves like the one in CNP on Monday may take time to work their way through the market. In other words, uncertainty surrounding a difficult-to-resolve issue may make additional volatility more likely, in which case the rebound immediately after a big down day may have difficulty finding its legs.

Market Mover Update: Retail sales may have come in stronger than expected on Tuesday, but they weren’t hot. There was nothing in the numbers to derail the cooling inflation narrative that currently has the Fed on track to cut rates in September, which Morgan Stanley & Co. analysts still expect to usher in the first of three rate cuts this year.³

After closing higher Monday—its first day of trading after a 10-for-1 stock split— Broadcom (AVGO) pulled back to a nine-day intraday low on Tuesday (see “Stock splits in the spotlight”).

Today’s numbers include (all times ET): mortgage applications (7 a.m.), Housing Starts and Building Permits (8:30 a.m.), Industrial Production and Capacity Utilization (9:15 a.m.), Atlanta Fed Business Inflation Expectations (10 a.m.), EIA Petroleum Status Report (10:30 a.m.), Beige Book (2 p.m.).

Today’s earnings include (all times ET): ASML (ASML), Johnson & Johnson (JNJ), US Bancorp (USB), Prologis (PLD), Alcoa (AA), Crown Castle (CCI), Discover Financial (DFS), United Airlines (UAL), Wintrust (WTFC).

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¹ AP News. Texas Gov. Greg Abbott demands answers as customers remain without power after Beryl. 7/15/24.
² All figures reflect CenterPoint Energy (CNP) daily closing prices, 1962–2024. Supporting document available upon request.
³ MorganStanley.com. We Believe the Fed Will—and Should—Cut Rates Soon. 7/12/24.