Major Indices Back Toward Unchanged Levels

MarketInsite Stocks Graphic

Friday, December 28, 2018, 1:19 PM, EST

  • NASDAQ Composite+0.32%Dow+0.35%S&P 500+0.33%Russell 2000+0.23%
  • NASDAQ Advancers:1575Decliners:823
  • Market Movers RIG+6.6% TSLA+3.9% LPI-4.4%

Market Movers

  • Chicago Purchasing Manager Index comes in at 65.4, down somewhat from November but well ahead of the expected 60.2
  • Pending Home Sales fall for a second month
  • Today was the final trading day this year for both China
  • Crude Oil higher following inventory data

Steve’s Commentary

The markets opened higher today following gains in Asia and Europe, but weak pending home sales data sent the major indices back toward unchanged levels. Thus far today’s volumes are somewhat lower than what we’ve seen in recent days, but still good for a holiday week. No matter, barring a late sell-off the major indices will close the week in the green. Pending homes sales fell for a second month, down 0.7% in November and 7.7% YoY.

Pending sales have been down in five of the past eight months with higher rates, higher sales prices, politics and market volatility taking a toll. Sales were lower in the South and Midwest but higher in the West and Northeast. Going forward the government shutdown is hampering the processing for flood insurance applications and the National Association of Realtors estimates about 40k closings per month will get delayed should the shutdown persist. The NAR cautions that reduced closing of that scale could result in a 9% decline in existing home sales.

Typically a news event triggers a move in the market, but this week it was the moves themselves that became the news. Yesterday was a great case in point: the markets opened reasonably lower following Wednesday’s rally, but at 2pm ET the market reversed and closed higher on nothing specific.

Most of yesterday’s gains were concentrated in the larger cap stocks while the small and mid-cap laden Russell 2000 index gained only 0.15% with half of its members stocks closing in the red. IHS Markit estimates that short positions in the S&P-500 ETF rose to a two-year high leading into the Christmas Eve sell-off, so short-covering may have been behind some of the recent gains.

Analyst Pravit Chintawongvanich at Wells Fargo says he thinks pension funds drove the recent gains. By his calculation the fourth quarter portfolio adjustments amounted to about $60 billion, the most ever, so there is that. Of course it should be noted that the on both Wednesday and Thursday the market was treated to a relatively quiet White House – no surprise policy moves or unsettling tweets.

Political uncertainly is perhaps the biggest headwind going into 2019, and with the federal government partially shut down over a boarder wall funding, what will investors see this spring when the debt ceiling requires attention?

The sector view is mixed with no leadership up or down. REITs are taking the biggest hit with an 0.6% decline, but even with that the space is only fractionally down for the week. WTI crude oil trades 2.2% higher following DOE data showing a drawdown in crude and distillate stockpiles and a lower than expected build in gasoline. The dollar and gold are both a little lower while treasuries are slightly firmer.

There is more on the docket next week than one might expect. On Wednesday the 116th Congress takes control and ISM Manufacturing data is released, and we also get a look at the labor market with ADP Employment and Nonfarm Payroll data.

Sector Recap

Click the image for larger view

Brian’s Technical Take

Late yesterday equities staged an impressive rebound to finish in the green after being down as much as 3-4% intraday. Reports said it was the biggest reversal since 2010. Quite frankly I do not know how many more “historic” record setting moves, up or down, I can take for one month. 2019 can’t come soon enough. In saying that this doesn’t compare to 2008.

Prior to joining Nasdaq in mid-2016, I was an institutional equity and option trader for 16+ years. The last nine years of that run was at a fundamental research boutique (eleven employees) covering large cap financials. I started there in March 2007 and our two person trading desk executed all client flows through the collapse of Bear and Lehman, and everything that came with it – ring-fenced housing, GSE’s, Paulson’s bazooka, TARP, QE, Dodd-Frank, zero bound, short sale restrictions etc.

We thrived in the early going with our research team having a bearish call going into the crisis, but certainly felt the pain of getting bullish too early in the summer of 2008. Aiming to provide quality executions was nothing short of wild with multi-billion dollar financials, and every other sector for that matter, swinging 10% - 20% in minutes at times. To this day the sound of the opening and closing bell can at times bring me back to a split second thought of “oh snap! Did I get all my orders complete?”

Although 2008 was peak volatility from my perspective, this month has been a slight reminder to those days. And while I look forward to the New Year in the hopes of better things compared this soon-to-end Q4, I know from a seasonal perspective that January ranks 2nd in average variance (high-low, low-high) since 1950. January is normally really strong, or really weak.

I personally do not track sentimental data, but from reading public reports I understand the current bearish sentiment is extreme. This is normally a contrarian indicator seen at meaningful lows. We certainly can go lower from here, but sooner or later we are due for a sharp rally.

Outside of technicals I look at valuations where the S&P 500’s 2019 PE is below 15. The economy should slow and earnings growth is expected to come down meaningfully, but both from high levels. Maybe this is what the reset is all about? Despite strong average hourly earnings above 3%, inflation measures have fallen sharply. Many global markets are already in bear market territory and by the time the remaining few get on board, I suspect the worst will be over and the recovery underway.

On that note I leave you with the weekly period chart of the emerging market ETF (ticker EEM). You know the institutions traffic in like this vehicle with its impressive 98M share average daily volume (50-sma). It made its weekly closing low back in October and has since been consolidating above/along the ~$38 support. The trend is clearly down and new lows are a very real possibility, however from a glass half full perspective:

  • The 2018 high-low decline peaked at 27.9%.
  • The October low came within 1.5% of the 61.8% retracement of the 2016-2017 uptrend.
  • This week’s price pattern has formed a bullish “piercing line” pattern, albeit this needs a green candle next week to confirm.
  • The location of the reversal is taking place along clearly established support ($38)
  • The inversely correlated US dollar is trading near the low end of its two month range with risk for more downside (see yesterday’s update for more on the dollar).

Click the image for larger view

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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