Friday, November 9, 2018, 12:36 PM, EST
- NASDAQ Composite -1.81% Dow -0.90% S&P 500 -1.12% Russell 2000 -1.59%
- NASDAQ Advancers: 510 Decliners: 1805
- Today's Volume + 22.73%
- Crude -1.27% , Gold -$1.41%
- October US Producer Price Index +0.6% vs. consensus +0.2%; October ex-Food & Energy +0.5% vs. consensus +0.2%
- September US Wholesale Inventories +0.4% vs. consensus +0.3%
- November US Michigan Consumer Sentiment (preliminary) 98.3 vs consensus 98.0
The markets are off to a decidedly muted start to the trading day on concerns over rising rates, global growth and oil sliding into bearish territory. Turning first to interest rate concerns, we examine yesterday's Fed results. The Fed's policy statement could have been dubbed "much ado about nothing." The policy making committee, as expected, kept the federal funds rate in a range of 2 percent to 2.25 percent. There were a few changes to the way policymakers are viewing economic conditions. On the upside the committee noted that the unemployment rate "has declined" since the September meeting.
However, the statement noted that the "growth of business fixed investment has moderated from its rapid pace earlier in the year." The Fed said it expects "further gradual increases" in the target range for the federal funds rate and that will depend on continued economic expansion, strong labor conditions and inflation near its 2 percent target. The Fed also indicated it does not expect to be pushed to raise rates by inflation, noting inflation looks set to remain near 2 percent for the next 12 months. Some investors were looking for mention of the market's whiplash in October, but the Fed's lack of comment on the market sell off was interpreted as hawkish:
"Interest rates are still accommodative, but we're gradually moving to a place where they will be neutral. We may go past neutral, but we're a long way from neutral at this point, probably."
Looking at global growth, the concern is firmly focused on China after it was revealed that the government plans to set quotas for banks to inject credit into private companies. This was followed by a slew of reports that revealed weak producer price gains, five straight months of lower auto sales and poor earnings results from several Chinese consumer companies and the fact that there is no sign the US / China trade war is going away any time soon.
Finally we turn to oil where West Texas Intermediate (WTI) fell to an eight month low yesterday hitting $59.78, officially more than 20% lower than the early October highs and entering Bear market territory on concerns of oversupply and lack of demand due to lower global growth and trade disputes. Yield on the 10 year has retreated a bit today currently at 3.18. The dollar index has risen to 96.73. The volatility index (VIX) has risen from yesterday currently at 17.87.
The economic calendar had a fair amount of data to report today. First up was the producer price index for October that rose 0.6% from September after a 0,2% advance. This rise, which was more than forecast, was the biggest increase in six years on broad gains in costs for goods and services. Producer costs excluding food and energy, which economists prefer as it strips out the most volatile components, rose 0.2%. These figures seem to indicate that price pressures in the production pipeline are steadily advancing. If nothing else this report explains why numerous companies during third quarter earnings reporting are warning about higher input costs and increasing prices.
Wholesale inventories for the month of September increased to 0.4% from 0.3% the previous month. Consumer sentiment for the month of October fell slightly to 98.3 from 98.6 remaining at an elevated level amid improved finances and pre-holiday optimism, but maybe feeling the early effects of potential higher interest rates curtailing car and home purchases.
On the gold front, the shiny metal is retreating a bit today, poised for its biggest weekly fall since the month of August as the dollar rose to a 16 month high after the Fed stuck to its monetary policy, on track to raise rates again in December. The rising dollar makes gold more expensive to holders of other currencies. In addition, rising interest rates also hurts bullion as it is a non yielding asset.
From a sector perspective we are looking at mostly a red screen but there are a few green shoots. Consumer staples, utilities and REITs lead (slightly) while the other eight sectors are led lower by technology, materials and consumer discretionary. Within the technology space the FAANG names and the chip sector are exerting the most pressure. That's it for this week.
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Brian's Technical Take: Crude could be setting up for a bullish reversal
Yesterday the Dow Jones Industrials and S&P 500 peaked intraday at the 76.4% and 61.8% Fibonacci retracements of their October decline. From there both indices reversed lower to finish in the red for the first time this week, and today each are now seeing downside follow-through. The pullback is relatively minor so far and somewhat in line with what we were expecting after a strong rebound off the October lows. Dip buyers may now be looking for entry points to get on board for the expected Santa Claus rally, however they should not underestimate what is happening next door in the crude market.
WTI crude oil made a major low in June of 2017 at $42.05 and over the next 13 months rallied a remarkable 79% to its July high, $75.27. A mid-summer decline of 14% bottomed at the 40-week moving average, an expected support line synonymous with the 200-day moving average. The ensuing rally lasted into the first week of October culminating in a breakout to new highs. Just as momentum traders were kicking their heels with joy, the breakout to new highs was unable to hold for two consecutive sessions. What happened next was five consecutive weeks in the red for a total decline of 23%. The selloff knifed through the 40-week moving average, and the support line of a large "double top" price pattern which projects a measured move to $53.75, down another 10.5% from last sale. The QTD decline of 18.2% is its worst since Q3'15 when oil was in the back half of a 75% crash in less than two years' time.
While crude's decline from 2014 - 2016 was due in large part to a supply glut, there was also a global recession that exacerbated the downside price action. This year's weakness in global equity markets, including a decline of more than 30% for China's Shanghai Composite, is reflective of a global economic slowdown which some argue is not fully appreciated by the Fed. The US central bank is full steam ahead on its path of rate hikes and maximum quantitative tightening of $50B/month. Among global central banks the Fed is largely alone in its tightening policy which is reflective in widening spreads and dollar strength, the latter of which is generally seen as a headwind for most commodities.
Over the near term we actually think crude could today be making a near to intermediate term low. The daily RSI dipped below the extreme oversold 20 level today for the first time since December 2014 which was just a few weeks after crude's "Thanksgiving Massacre" and OPEC's decision to open the supply spigot. On an intraday basis WTI is now +1.8% from the morning lows and at the moment is forming a "hammerstick" bottoming pattern. In addition today's low bottomed at a cluster of technical support representing the 50% Fibonacci Retracement of the 79% uptrend in '17 - '18, and within 0.1%, or 6c, of this year's weekly closing low. This trifecta of technical support is a logical entry point for shorts to lock in gains, and for longs to try and catch a falling knife. At the very least today's low establishes a clearly defined price level for new entries to measure one's risk. And while there may be plenty of meat on the bone for long swing traders with a time frame of days or weeks, the 23% decline over the last five weeks could be a more concerning signal on the global economy and equity markets in 2019.
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Nasdaq's Market Intelligence Desk (MID) Team includes:
Charles Brown is Associate Vice President on The Market Intelligence Desk with over 20 years of equity capital markets experience. Charlie has extensive knowledge of equity trading on both floor and screen based marketplaces. Charlie assists with the management of The Market Intelligence Desk and works with Nasdaq listed companies providing them with insightful objective trading analysis.
Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.
Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.
Brian Joyce, CMT is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq's Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).
Michael Sokoll, CFA is Associate Vice President on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.