Bears are certainly showing the type of strength we haven’t seen in a long time. A week ago at this time futures were surging on news of a “truce” for 90 days between China and the U.S. in their trade spat. But the charts were still not saying lovely things despite a major rally the week prior. And by Tuesday, darkness had descended back on the indexes, with another gut punch Friday. A lot of emphasis was put on a long term Treasury yield dropping below a shorter term Treasury.
On Monday, the yield on five year government debt slid below the yield on three year debt, a phenomenon which has preceded previous recessions, and a sign that investors are more confident about current than future economic growth as the Federal Reserve raises rates.
The “two year” vs the “ten year” Treasury yield a lot of people like to watch and that hit its narrowest spread in 11 years.
There is no rush to be involved heavily in this market until this volatility sorts itself. The obvious near term “upside drivers” now would be (a) a real trade peace between U.S. and China and (b) the market’s favorite thing – an easier Fed; in this case that would entail signals to the market that the rate hikes forecast for 2019 are no longer in the cards. The latter is ALREADY being floated out to the investing community as the Fed has become a lackey for the market the past 20 years.
It’s always helpful to watch what major sectors are “strong” – in this case the type of sectors that institutional money flees into – utilities and consumer staples are holding up.
Meanwhile “growthy” areas like tech and industrials are sagging.
This whole move down was started by a spike in yields such as the 10 year – even with a big retreat this past week, the market did not respond positively.
This week was almost the exact opposite of the week prior with ~5% moves in the indexes either way week to week! Now that’s some good ole volatility. This week it was downward with the S&P 500 sinking 4.6% and the NASDAQ 4.9%.
On the economic front, ISM Services still came in a very healthy 60.7. Readings over 60 aren’t too common; anything over 50 signals expansion. Of course the market is a forward looking indicator.
As to the November employment data, the Labor Department estimated a gain of 155,000 vs expectations closer to 190,000. The unemployment rate held steady at 3.7%, as expected. Average hourly earnings grew 6 cents per hour from October, or 0.2%, just shy of expectations, and grew by 3.1% year-over-year, their highest rate since 2009.
Here is the 5 day weekly “intraday” chart of the S&P 500 … via Jill Mislinski.
The week ahead…
Fun fact – there have been 57 1% moves in the S&P 500 in 2018 vs the very strange year of 2017 where the snoozer market only offered up 8 such days! In terms of 2% moves, there were 0 in 2017, while there have been 16 in 2018.
The last Fed meeting comes the week after this (Dec 18-19) and one would expect more “leaks” about how 2019 is going to be more dovish than people expect.
Other than waiting for the leaks, watching the “flattening” yield curve will preoccupy the minds of many.
Short term: The S&P 500 spent exactly 1 session over our trend line (and the 200 day moving average) before getting crushed. NASDAQ didn’t even try to go above the 200 day. Looking at recent lows now becomes important – if those break, it would not be a positive.
The Russell 2000 still looks putrid. It is now facing lows of February!
The NYSE McClellan Oscillator spent much of last week in the black actually – but for now this is not an indicator we are going to focus on a ton as the charts are saying negative things for now.
Long term: The NASDAQ is the chart that interests me as it has such a well defined channel. Last week we said “So it appears 7500 is a good number to watch as a rally up and through that level would signal the index getting back in a channel it has been in for years!”
That didn’t happen – in fact the index got within a few points of 7500 – then was soundly rejected. This is why charts are fun to evaluate.
Charts of interest / Big Movers:
Another rough week in brick & mortar retail:
Thursday, Children’s Place (PLCE) plunged 13%, hitting 13-month lows, after the retailer cut its earnings and margin outlook for the full year.
Friday Big Lots (BIG) traded down 23.1%, after a wider-than-expected third-quarter loss.
Also Friday, Ulta Beauty (ULTA) slumped more than 13%, after a Thursday evening earnings release that predicted weaker holiday sales that analysts hoped.
Altria announced it would take a 45% ownership stake in the cannabis firm Cronos Group (CRON).
Have a great week and we’ll see you back here Sunday!