US Equities slip, “good” news overpowered by “bad” news.

Santa Claus rally hits a snag as US equities drop this week, bears come out to close the week just a day after a huge rally came into the close. Thursday’s late rally pressed optimism into investors but it was swiftly taken away. The Dow drop over 550 points after having dropped about 800 points earlier in the week.

Markets were closed this Wednesday in observance of ex-President George H. W. Bush’s funeral, there was early optimism in markets prior to the market closure. This was in part due to the optimism pumped into equities after the news of a potential cease fire between Xi and Trump. However, this now seems like jawboning. The inversion of the US Treasury yield curve came on Tuesday. The 5-year fell below the 3 and 2-year rates. This was also a catalyst to the downside in markets, scaring many investors. The 10-year also fell beneath the 2.85% level for the first time since the summer.

This week was full of surprise negative news, markets reacted poorly to the arrest of Huawei’s CFO in Canada. Who was later extradited to the US for violating trade sanctions. The volatility after the former Presidents funeral saw the VIX up passed the 25 level.

US equities fell into November and October lows while Russell 2000 fell beneath strong support established in the fall. Oil volatility was almost everlasting this past week as all eye were on the OPEC meeting. Oil managed to break key resistance which saw price oscillate for the majority of the week. The last two days of the week saw $4.00 moves in the Oil futures (CL). The $50.00 was almost broken, that support help oil climb back into the $54.00 area before selling off into Friday’s close. The late bullishness in oil was due to an agreement to reduce supply by 1.2M barrels per day in January. This is a short term bull for oil markets. It will be a strong bull only

Jobs numbers came out from the US this Friday, softer than expected, which led to overall drop in equities, having reacted bullish for a few minutes. The rate hike on December 19th is pretty much priced in, however there is still doubts of consecutive rate hikes throughout 2019. The more doveish Fed for 2019 did not help markets as much as other news hurt markets.

Here is a look of last week’s stock market on a daily basis (red vertical lines split days).

Stock Market and Sector Overview

Here is a break down of the weekly performance in various stock market sectors (top chart):

  • Energy stocks down 5.42%
  • Technology down 6.87%%
  • Financials down 8.35%
  • Retail down 7.73%
  • Utilities up 2.06%

Overview of key markets last week (bottom chart):

  • Crude oil down 3.47%
  • S&P500 down 4.67%
  • Silver was  up 4.03%
  • Gold up 1.45%
  • US dollar down 0.67%

 

US market, where are they going?

It’s been an interesting week in US equities this past week. No matter the news, they cannot seem to catch a bid. Just last week Xi and Trump came to a decision to halt on the imposition of tariffs after Jan.1st 2019. This prompted a leap in equities overnight, but bullish momentum could not sustain. Trump was quick to continue his tariff threats, days after coming to this agreement. The dinner meant almost nothing. Along with the new doveish stand of the Fed, markets had good news to catch a bid this week. That was not the case.

Among all of this news was the inversion of the 5-year US Treasury yields, under the 3-year and the 2-year yields. Although this is not the exact tipping point for a recession, it is worrisome nonetheless. Investors flooded out of risk on assets, pressing a bid into gold. The yield inversion that could mark the beginning of something more drastic is the 10-year to 2-year. In which the 10-year is dropping to levels not seen since the summer.

There have been further warning signs of potential downside. But there have been some of a potential bottom as well. How are we to interpret this?!?!

One Bank of America, Chief investment strategist, Michael Hartnett, the man who predicted a huge February sell off in 2018 has gone as far to say that the downside is far from over. Hartnett was the one who explained in a Bank of America article titled “Our Sell Signal was Triggered on Jan.30, S&P 2686 is Next”, why a 12% drop was imminent. In February of this year, the VIX shot up and the 12% drop was hit, plus a little extra.

Bank of America’s strategist has spearheaded an article called “The Big Low” in which he released in November. He explains bearish equities in the first half of 2019 and bullish markets in the second half. Hartnett predicts a V bottom move, and says “we are bearish stocks, bearish bonds, bullish commodities, bullish cash and bearish the US dollar”. Not to say that we should believe this man without a doubt, but there is some merit to his analysis.

There is an optimist in the ranks, JPM strategist, Marko Kolanovic. Who predicts a close at 3100 on the S&P 500 at the end of January 2019. He continues to believe in the “buy the dip” strategy. All of this while central banks reduce liquidity each month. There is a little more evidence for the downside.

Buying the dip works, until it does, and in 2018 it really doesn’t. Leading to YTD returns on assets generating all negative returns for the first time since the early 1970’s. The only assets that have scored a positive YTD return are cash, and the US dollar. This is important to note as cash usually outperforms other assets as the economy drops into a recession. 2018 has opened the doors to negative equities (-4.2%) and negative US treasuries (-4.9%). Both of these inversely correlated markets are dropping at the same time…worrisome. Investors and traders alike are dumping both risk on and off assets. With a $5 billion outflow from equities, and a $8 billion outflow from bonds the past week.

Out of 94 equity indices, 86 of them are red and out of 2767 global stocks, nearly 70% are down into “bear market” territory. Meaning have dropped at least 20%. FAANG stocks are down just over 25% from their highs, after being christened the “bull market leader”.

Circling back to our previous point, the past two pieces of “good’ news the market received were pretty much shrugged off. Both Trump/Xi trade negotiations strengthening and the Fed’s doveish stance. This is a sign of an oversold market unable to sustain any further bid. The next logical indication of a recession is the inversion of the 10-year and 2-year. After all, 7 out 7 times this has happened, a recession followed suit.

Recession vs Yield curve inversion- Bloomberg

Another point Hartnett makes, EPS are falling, the current 8.3% forecast for 2019 is even too high, along with the widening of spreads, there is still time for the bottom to form. Only when there are hints at rate cuts, and a cease in rate hikes can investors think to buy the dip.

Weekly Economic Calendar

This upcoming week, there will not be a lot of news out of the US. However traders keep your ears glued to trading new sources as there may be Trump updates on trade deals and other important news regarding Brexit.

Monday, two events out of the UK, GDP and manufacturing production.

Tuesday, more news out of the UK, Average earnings Index, and the Parliament Brexit Vote. This will impact the GBP, watch for violent swings. Keep your eyes on US equity markets on this news as well. PPI data out of the US comes out pre market.

Wednesday, two CPI reports out of the US.

Thursday, Monetary policy news out of Switzerland, watch the Swiss Franc. Main refinancing rates out of Europe and an ECB press conference, this will drive movement in the Euro and US equities.

Friday, two US pre market events concerning retail sales.

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