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Rotating Sectors Cause Investment Fluctuations

Friday, November 16, 2018, 12:08 PM, EST

  • NASDAQ Composite-0.49%Dow+0.25%S&P 500+0.05%Russell 2000-0.11%
  • NASDAQ Advancers:885Decliners:1433
  • Today's Volume (100 day avg)-0.5%
  • Crude $57.65+2.13%, Gold $1221.60+6.70, VIX 19.59-1.95%

Market Movers

  • Tech Sector giving pause as NVIDIA Corp. (NVDA) and Facebook (FB) make fresh 52 week lows post earnings and news
  • Brexit drama continues as a no confidence vote for Theresa May gains momentum
  • Oct U.S. Industrial Production +0.1% vs. consensus +0.2%
  • Oct Capacity Utilization 78.4% vs. SA 78.2%
  • Federal Reserve Vice Chairman Clarida told CNBC today that the FOMC is closer to a neutral stance and should be "data depended" on future rate hikes

Chris's Commentary

U.S. equity markets opened lower but are now trading mixed to higher as the markets attempt to hold onto yesterday's broad based rally. Trading volumes on the consolidated tape continue to trend higher than the YTD average as volatility and sentiment continue to drive markets. Currently 5 of the 11 S&P 500 sectors are trading lower with Consumer Discretionary and the new Communications sectors the worst performing.

Energy is one of the best performing sector up nearly1% which makes sense as crude oil is also up over 1%. Crude has fallen over 26% since the early October highs. Gold trades higher while the dollar is lower. The yield on the 10-yr has retreated to 3.0847 after yielding more that 3.2% last week.

Sector rotation seems to be the main investment theme here as the S&P 500 Healthcare Sector is now the best performing of the 11 sectors. The group is up over 11% YTD, and one of the clear business beneficiaries, post mid-term election results. Tech is still a top performer up 8% YTD, but has given back some significant ground following a number of recent earnings and guidance announcement.

Consumer Discretionary (+6.5% YTD) has seen similar pressure as Tech, giving back some significant ground as a number of high profile retail names have release lighter than expected earnings and guidance this week. The S&P 500 Consumer Discretionary Index is down over 5% since this time last week.

Trading volumes continue to trend higher with the average daily trading volume on the consolidated tape averaging over 8.33 billion shares a day since October. The year-to-date average is 7.09 billion shares a day and the daily average prior to the October volatility was 6.87 billion a day.

The VIX or volatility index is up nearly 78% YTD but has spiked over 63% since October 1st which correlates directly to the trading volumes. The correlation between the VIX and trading volumes is clear.

As markets volumes continue to increase based on sector rotation, growth fears, reduced guidance reports and macro-political fears, the VIX will continue to spike and validate this prolonged market malaise.

Sector Recap

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Brian's Technical Take

Fed Speak Spooking the Dollar

The US Dollar Index (DXY) started the week strong by breaking out of a three-month trading range to fresh 17-month highs. The breakout was short lived however with the DXY down in three of the next four sessions. For the week that makes three days in the red and two in the green which in and of itself is not all that concerning for bulls, however the recent Fed speak should be.

In a speech on Wednesday Fed Chairman Powell noted potential challenges to the US economy in 2019 (slowing global growth, fading fiscal stimulus, and impact of higher rates) which could cause the Fed to slow the path of rate hikes. None of these risks are by any means new. Countless market experts have been highlighting these same risks, as well as others, since early October when justifying the correction in equities.

However until this week the Fed Chair has played down the recent market correction while highlighting the strong economy. Powell's "less hawkish" performance was followed up today by Fed Vice Chairman Richard Clarida who amongst other things stated (i) the committee needs to factor in the global outlook, (ii) he does not expect a big pickup in inflation in 2019, (iii) evidence of global slowing, and (iv) Fed policy is getting closer to neutral.

To be fair Powell and Clarida each made hawkish commentary in their remarks , however the clear takeaway is the leadership at the Fed is showing a willingness to be flexible when it comes to the current path of rate hikes. The median forecast amongst Fed officials is for one rate hike in December and three more in 2019. It sounds like the committee is now rethinking that trajectory.

From a technical perspective the weekly period chart of the DXY shows a bearish "dark cloud cover" candlestick pattern. And with a little more weakness by today's close, this will morph into a "bearish engulfing" candlestick pattern. Six of one, have dozen of the other as each pattern has the same bearish connotation.

Confirmation of either reversal pattern requires a red "stick" next week, but this week's high is the level to measure risk against. The location across a prior high makes it all the more intriguing, and to boot we have a bearish divergence with the weekly RSI peaking back in August vs. price which peaked earlier this week. Momentum often leads price.

While we previously were looking for a bullish breakout to lead to accelerating upside momentum, the change in Fed-speak combined with the recent reversal signals are to be respected. This scenario fits nicely into the seasonal strength in equities and the typical year-end Santa Claus rally.

A reversal in the greenback would be a yuge gift for risk takers looking to improve performance with just six weeks left in the year.

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The National League Cy Young winner for 2018 has been announced. NY Met ace Jacob DeGrom, with a remarkable 1.70 ERA, took home the award. How many other Metropolitans have won the award and did any have a better ERA?

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.