Markets Reclaim Some Of Yesterday's Gains

An image of rising and declining prices Credit: Shutterstock photo

Thursday,December 27, 2018, 12:29 PM, EST

  • NASDAQ Composite-1.46% Dow-1.08% S&P 500-1.15%Russell 2000 -1.76%
  • NASDAQ Advancers:725 Decliners:1643
  • Today's Volume (vs. yesterday)-6.77%
  • Crude-2.19%, Gold+0.13%

Market Movers

  • US Jobless Claims for w/e December 22nd 216K vs. consensus 216K; Continuing Claims for w/e December 15th 1701K vs. consensus 1685K. Prior period was revised up to 217K from 214K
  • October US FHFA House Price Index +0.3% vs. September reading +0.2%
  • US Bloomberg Consumer Comfort for w/e December 23rd 59.4 vs. prior week 58.8
  • December US Consumer Confidence 128.1 vs. consensus 133.6

Charlie's Commentary

Part of the perils of writing a market note every day is that you are at the mercy of the market and its prevailing trend. Yesterday was a case in point as when I started the note, the Dow was trading up over 200 points before going negative by 80 points while I was half way through. It then proceeded to zigzagging back and forth between positive and negative territory as I furiously adjusted my narrative, ultimately catching an oversold bid in the afternoon to finish up by 1,086 points.

The index finished with an increase of 4.98% at the end of the day as all the major indexes surged the most since March of 2009. It was the largest single point gain in the stock markets history. Consumer Discretionary, Energy, and Technology were all up over 6%. Stellar holiday retail sales numbers and a statement from Kevin Hassett reinforcing Fed Chairman Powell's job security, were seen as catalysts to buying the market that is seen as oversold by investors who up until now have lacked the conviction to jump in and buy.

The action during the day was seen as a combination of bargain hunting and short covering. The S&P 500 has managed to hold the key support level of 2350. Many analysts believe that breaking below that level would create "trap door selling". Is this a belated beginning to the Santa Claus rally typically seen during the last 5 trading days of the year and the first two trading days of January??

This morning's market is saying not so fast. While parts of Asia were able to follow suit and continue the momentum, Europe has been unable to continue the momentum. Reading my friend Arthur Cashin's note this morning, he points to two cautionary historical statistics in Bloomberg. 1) In eight previous bear markets, the S&P 500 has experienced rallies of greater than 2.5% more than 120 times. 2) From the collapse of Lehman Brothers to the financial crisis bottom in March 2009, the S&P rallied more than 4% on 13 different occasions.

He points these two statistics out not to kill optimism but more to say that it's not time to ring the "all clear" bell just yet. He also states that while yesterday's point move was impressive, volume was still relatively light befitting a holiday week. There is an old traders adage that volume equals validity and we just haven't seen volume levels that equate to conviction.

We also have some unsettling political headlines to digest this morning. Several newswires are reporting that President Trump is considering signing an executive order banning U.S. companies from using products built by Chinese companies Huawei and ZTE. If true this would muddy the current progress being made between the China and the U.S. in their trade negotiations.

So here we go again. All is not doom and gloom today however. An interesting tidbit in this tumultuous market is the rise in insider buying. The number of corporate executives and officers buying up shares of their own companies has doubled in the past two months when compared to the previous two.

According to the Washington Service, insider buyers are outpacing sellers by the most since August of 2011. With profits from S&P 500 companies expected to rise to a record $173 a share next year, it's a good sign that insiders are expressing a vote of confidence in the demand for their company's services and feel comfortable buying their own shares despite the headline risk.

Finally, we have yet to see Pension Fund activity so common at the end of the year. In the past, during good years they have sold good performing stocks for fixed income. This year, analysts predict that they will be selling Treasuries to purchase cheap beaten down stocks. The rally may still come but it might extend farther into January.

On the economic front we had jobless claims for the week ending December 22nd that fell slightly, close to a five decade low, underlying strength in the labor market. Jobless claims fell by 1,000 to 216,000 matching the median estimate of economists surveyed following a revised reading of 217,000 the prior week. Initial claims.

That number was slightly above the 49 year low of 202,000 reached the week ending September 15th. The unemployment rate among people eligible for benefits held at 1.2% for a third straight week. U.S. October home prices rose 0.3%, up slightly from 0.2% the previous month.

The Bloomberg weekly consumer comfort index improved to 59.4 during the week ending December 23rd from a reading of 58.8 a week earlier. U.S. December consumer confidence fell to 128.1 vs. 136.4 the prior month. The average estimate was for a reading of 133.5.

Turning to the commodity space, oil is coming off its best day so far in 2018 rising as much as 10% on the day, the most since November of 2016 as rumors swirled that OPEC and its partners could meet again shortly to discuss further cuts in output. Adding to oil's gains were comments by Russian Energy Minister Alexander Novak saying the market will be more stable in the first half of 2019 signaling cooperation by OPEC and its allies supporting the market.

This morning however those gains are being wiped out, slipping back towards 18 month lows on worries over a glut in supply and concerns over a faltering economy pressuring prices and demand. With the risk off sentiment of today gold is rising supported by a weaker dollar as investors buy the metal to hedge against falling stock prices.

All 11 sectors in the S&P 500 are trading in negative territory with the leaders of yesterday's rally, Technology, Communications, Consumer Discretionary and Energy, all trading down over 2%. On the opposite end of the spectrum, Utilities, Materials and Financials are the best performing, but still down over 1%.

Sector Recap

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Brian's Technical Take

It took a couple of hours into yesterday's session before equities followed oil's lead with each asset class having one of its best days in a decade. One day certainly does not make a trend and we are already seeing weakness for both stocks and oil in the early going today, but my bias is this relief rally has more to go into early 2019 before then a possible retest of the lows and a potential "double bottom" on improving breath and momentum.

This Q4 correction has been historic and looking into 2019 we should see a more cautious Fed in terms of future rate hikes. All else being equal that alone argues for a weaker dollar which would be a welcome relief for many risk assets.

The US dollar index made its 52-week closing high back on November 12th and has since been consolidating "sideways". Since last week's FOMC meeting it has been oscillating around the 50-day moving average with no clear transition from consolation to trend. If the broader risk sentiment is going to see any follow through from yesterday's rebound, I suspect a weaker dollar will accompany that.

The weekly period chart of the US dollar index (DXY) shows $97 has been a clearly defined resistance line since mid-August. While the DXY has seen temporary moves higher, it has not been able to string together two consecutive weekly closes north of $97.

There are certainly many factors that go into a single currency, and an expectation of less rate hikes is likely to be a headwind for the greenback. Also, the euro makes up 58% of the dollar index. With the ECB just ending its QE program, along with an expected budget deficit resolution with Italy, that could weigh on the dollar as well.

For the EURUSD currency pair, 1.13 has been the clearly defined support line since mid-August. Over the last six weeks price has been consolidating along this support in an increasingly narrow range. One way to measure this range compression is by looking at the width of upper and lower Bollinger bands.

Each band represents two standard deviations above/below the 20-day moving average. Over the last week the bands were at their narrowest range in more than four years. And since last week's FOMC meeting, it is the upper band that is being repeatedly tested.

Eventually from tight ranges comes expanding ranges as price transitions from consolidation to trend. And when range measures bounce higher off of multi-year lows, the ensuing price moves can be powerful. Whatever the catalyst(s) - no rate hikes in 2019, an improved outlook in the EU, narrowing rate disparity, a "wink wink" from our Treasury Secretary - the EURUSD pair looks to be setting up for a "breakout".

A spike higher should bode well for risk sentiment and asset prices both home and abroad. Two consecutive closes above 1.1475 could be the trigger from a technical perspective.

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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.

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

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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