Correction Territory Looms Large Over Stocks As We Approach The Holidays

MarketInsite Stocks Graphic

Friday, December 21, 2018, 12:16 PM, EST

  • NASDAQ Composite -1.06% Dow+0.15% S&P 500 -0.11% Russell 2000-0.94%
  • NASDAQ Advancers: 1145 Decliners: 1188
  • Today’s Volume (100 day avg) -0.05%
  • Crude $68.05-0.24, Gold $1337.40-$9.40

Market Movers

  • NY Fed President suggests Fed could change plans if needed, helping stocks
  • Durable Goods Orders of 0.8% are lower than the expected 1.6%
  • Personal Income of 0.2% was lower than the 0.3% expected
  • Consumer sentiment higher at 98.3 vs. 97.4 est

Mike’s Commentary

The New York area is a dreary, soggy mess this morning and the drumbeat of negative headlines is not helping the mood any either. Picking a few of the half dozen headlines that just went by are that stocks are having their worst week in 9 months, are down 10% in December and that nine of eleven S&P Sectors and two thirds of S&P stocks are in correction territory. The VIX hit 28 yesterday, the highest since March, and the S&P is at 15 month lows.

Given that, you might expect bargain hunting to surface. Today, we witnessed a rebound with the Dow up over 300 points at today's highs and currently giving back gains to net a +65 point gain. Other indexes are mixed with small caps under performing again. We have seen some sharp reversals this week so are cautious.

In addition to the trade/growth/Fed reasons for the selloff this week, markets are focusing on the added uncertainty of a possible government shutdown. We don’t find that necessarily market-moving but in the current environment the news is just adding to the negativity. China took steps to loosen financial conditions as it combats a slowdown.

Globally, stocks were lower heading into the trading session but a reversal in Europe helped U.S. futures move slightly into the green as we approached the opening bell. The Dow is up about 65 points as stocks fight back today after Federal Reserve Bank of New York President John Williams said that the Fed could reassess its interest rate policy and balance sheet reduction in the new year if the economy slows.

Keep in mind that today is a “quad witch” Friday with stock, index, and futures options expiring along with single stock futures. There are also index rebalances at multiple Nasdaq, Russell and S&P indexes that will cause block trades at the close and after-hours in many companies. For some, this volume can be significant.

If you see large blocks in you stock today you are not alone. Call us if you have questions. Things should be back to “normal” next week but Monday features a 1 p.m. close (no Midday report) and volume is expected to slow considerably next week.

There were a number of economic releases today. GDP (third look) was reported at 3.4% vs. the 3.5% earlier reads. The PCE Core price index, reportedly a favored measure of the Fed, registered an increase of 0.2% in November, indicating moderate inflation. Durable goods orders rose a less-than-expected 0.8% vs. the 1.6% consensus. Excluding Aircraft and Defense orders, the measure fell by 0.6% so this is concerning. Personal Income rose 0.2%, below the 0.3% expected but personal spending rose 0.4% vs. 0.3% expected.

Finally, University of Michigan Sentiment was reported at 98.3 vs. an expectation of 97.4. There were some weak data points in the headline numbers but stocks held on to gains. And 4Q GDP estimates are ticking up slightly, currently in a the range between 2.5% -2.9% so the data is still indicating a decent economy.

I’ll be out next week celebrating Christmas and I wish everyone happy holidays and a prosperous New Year.

Sector Recap

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Brian’s Technical Take

The broad equities indices are oscillating around breakeven to slightly higher with the defensive utility and REIT sectors outperforming in the early going as the risk of an imminent government shutdown looms, along with everything else. December has been an absolutely brutal month for equities in the face of typically strong seasonals.

The Dow Jones Industrial Average is now on pace for its 2nd worst December performance, and at yesterday’s lows its 8th worst Q4, since the start of the 20th century. We noted similar stats in last Monday’s (12/10) MIDDAY update and the company of depression and world wars in most other instances.

From a glass half full perspective, many breadth readings are showing extreme oversold readings. One popular metric is the percentage of stocks making new 52-week lows which for the Russell 3000 index, encompassing 98% of all US-listed securities, reached 38% yesterday. Excluding 2008 which alone had eight sessions with readings above 38%, yesterday’s figure ranks the 5th highest since 1950. Extreme readings are often an indication of a low, but as in 2008 that is not always the case.

Yesterday’s declines saw the Nasdaq 100 (NDX) as the last major equity index to make fresh YTD closing lows vs. the prior low from February and for me a potential bottoming signal in the near to intermediate term. A broken clock eventually gets it right.

It was interesting to see the dollar index (DXY) lower in yesterday’s session despite Powell’s less dovish Q&A on Wednesday. Maybe it had more to do with the budget resolution between Italy and Brussels, or the potential government shutdown. Whatever the reason it is too soon to make much of one day’s price action. One day does not make a trend. The DXY is up today and has reclaimed its 50-day sma, but its price action from here will be worth keeping on the radar.

Despite yesterday’s risk off action, the long ten year yield gained 5bps to 2.81%. Two weeks ago on 12/4 we highlighted the historic streak for the long yield which then at 2.94% was matching a record five straight weeks in the red. We noted (i) five consecutive weeks down matched an all-time high and accordingly it was likely due for a near term bounce, however (ii) the measured move of its “double ‘top” pattern carried a price target to 2.75% - 2.80%.

The 10yr yield has never been down for six straight weeks and sure enough last week we saw a modest 5bps rally. This week the long yield resumed its downtrend with a current WTD decline of 10bps and it bottomed yesterday right at 2.75%. The 2.70 – 2.75% range previously acted as support from March through May and thus is an expected support level today, at least temporarily.

Supporting the case for a larger rally is the bullish divergence with the daily RSI making a higher low this week vs. the lows made at the end of its 5-week decline two weeks ago. Momentum often leads price, in this case yield. However with plenty of headline risk from the government shutdown, Syria, confusing Fed, China, Brexit, Trump, etc. etc. etc., intermediate term support levels can easily be taken out. A breakdown to fresh lows shows what looks like much greater support at 2.64% which represents the highs of 2016 and 2017.

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Friday Trivia Question: What holiday movie includes a cameo by Donald Trump?

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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