The Fuse
Equity futures are back on track after a couple of nasty sessions. The Industrials in particular are swooning, down 9 sessions in a row and 11/12, a streak we have not seen on the downside in about 50 years. Volatility is down however and that may lead to more stock buying if that trend continues today following the Fed statement and policy.
Interest Rates are up again this morning as the 10 yr continues to make a push towards 4.5%. Yesterday’s selloff in the bond market reached a pivotal point as bargain hunters came in to buy fixed income, but they ar giving back this morning. That may change of course following a new Fed policy decision. The fed funds futures market sees a 95% chance of a cut today to 4.25% which would be less than the 10 yr and slightly below the 2 yr. This tells us the Fed is likely to remain on hold at this rate for awhile.
Stocks in Europe were flat overnight, the dollar gained some ground while gold was flat. Crude was up .8% and pushed WTIC above $70 per barrel. German 10 yr bund yields were up 1bp, US 10 yr yields down 1bp. In Asia stocks were mixed, Japan’s market declined .7%, while Hong Kong and Shanghai rebounded, up .8% and .6% respectively.
Earnings this morning from Birkenstock, Jabil and General Mills. Later today we’ll hear from Micron, Lennar and Steelcase, tomorrow ACN, Darden, Paychex, Factset and Cintas and Carmax.
The big event of course the Fed meeting this week. This is the last one of the year and the committee will likely cut rates one more time but also signal a pause in future policy moves. Also, less than two weeks before Christmas and retailers are getting nervous about late shoppers. Will they come through once again?
The pressure is mounting on equities as again another rally fails to followthrough. Even the very strong Nasdaq, which was the beacon of light Monday was clipped at its heels. Of course, a followthrough day to the downside would be a danger signal, however there is plenty of time to rehabilitate the situation. Breadth has just been horrible for days, even when the market opens up higher the breadth is simply atrocious. The internals below tell the story again.
Volume trends have been subdued, so we’ll grade it a neutral. However, we could see turnover really start to pick up later in the week with a big options expiration on Friday and the Fed decision later today. With elevated volatility (relatively speaking) there could be a wild ride today. Pay attention to the VIX, which moves to the January future today. The VIX term structure is now in bullish mode (for stocks).
Hard to believe the Industrials are now down nine consecutive days. That is the logngest down streak in years, and comes at a time when seasonal trends are bullish. Amazingly enough, the Industrials have only been positive once this month, eleven down sessions. This index has clearly fallen off a cliff but is due for some relief. Small caps are also in trouble as the IWM has itself failed to hold support and is making lower highs, lower lows. That my friends, is a downtrend.
The Internals
What’s it mean?
I could place here the same wording over the past couple of weeks and it would not even change a bit. More downside, more weak breadth, more down volume, more heavy sell programs. Wash, rinse and repeat. The VOLD is really poor and is showing signs of weakness again. Put/calls are starting to move higher, the VIX even shot up as well. Simply put, the internals are telling us the market is in trouble, the price action is not telling us the same yet.
The Dynamite
Economic Data:
- Wednesday:Housing starts, FOMC rate decision, Chair Powell press conference
- Thursday:Jobless claims, GDP revision, Philly Fed, home sales, leading economic indicators
- Friday:income/spending, PCE, consumer sentiment
Earnings this week:
- Wednesday:GIS, BIRK, JBL, TTC, MU. LEN
- Thursday:ACN, DRI, CTAS, FDS, PAYX, CAG, KMX, NKE, FDX, BB, SCHL
- Friday:CCL, WGO
Fed Watch:
We have come to the last Fed meeting of the year and in all likelihood the committee will cut rates another 1/4 point. I suspect there will be rigorous discussion and dissent over policy this time around. Inflation remains sticky and the FOMC is showing some concern that further easy money policy is going to stimulate inflation and recreate another spiral. The Fed needs to temper enthusiasm, which may feel like a splash of cold water in the face.
Stocks to Watch
Volatility – The vix futures will roll next week along with SPX futures, which move to March. The VIX is extremely low here, under 14% and has quite a bit of separation from the future (about 5% differential). Look for some movement this week.
Options – A huge option expiration week coming up Friday that could bring a slew of volume and movement post Fed meeting.
Bonds – They have been slowly selling off recently and if the Fed does cut rates the inversion is likely to over for the first time in many months. This simply means the yield curve is back in alignment, but for how much longer?
