The Fuse
Markets are scraping at any upside they can get after the Fed and Chair Powell delivered a crushing blow to the bullish uptrend. The long-term trend is still in tact but the short term was hit really hard. We see futures up a modest amount compared to what was lost on Wednesday. The VIX is getting belted.
Interest Rates, which soared on Wednesday continued to move higher this morning, understanding the warning from Chair Powell that if inflation does not come down even more then the committee will hold up on rate cutting policy. To be clear, the fed funds futures market is now in alignment with the committee’s projections of two cuts in 2025, but it may not be that easy to get to.
Stocks in Europe fell hard as they followed the lead of the US markets. The STOXX fell 1.3% on heavy volume selling. The dollar was flat after a strong move up on Wednesday. Crude oil is mostly flat, gold down nearly 1%. German 10 yr bund yields rose 4bps while US 10 yr yields flattened out. In Asia a milder selloff with Japan down .7%, the Hang Seng off .6% and Shanghai down .4%.
Earnings last night from Micron were higher but the forecast was huge miss on the top/bottom line, the stock is getting crushed. This morning Accenture came in with a nice beat. Later tonight it is FedEx and Nike, tomorrow am Carnival Cruise Line.
The Fed continued with an easing policy but it was the statement and hesitancy to continue on in 2025 that really upset the markets. But, if you have been reading this daily column you know the market was in trouble. Just having read about the internals and the poor breadth there was plenty to explain how/why today’s market performed. Going up is like taking the stairs, going down is like taking the window.
Very poor breadth again, exaggerated by the extensive selling that took place after the Fed meeting was completed. Breadth was bad even before the comments from Chair Powell which led to excessive bleeding. We can unequivically say the market is deeply oversold. Oscillators have registered a monster negative number, the lowest in months, where we often see a large bounce occur. Oscillators are -310 and -292 respectively, they can go lower but the odds do not favor it. This seems to be a short-term tantrum that will run its course through January.
Very heavy turnover, large distribution days across the indices as the selling was intense. Given the position markets are at in the week there is no room for error.
Further, stocks remain oversold and can stay that way for some time. Volatility exploded, the VIX cruising up some 74% on the day, which is probably too much to handle for the bulls. We could expect a large snapback rally within the week, but traders will now exercise caution.
We had been talking about the number of days stocks had been going without some test of support. Remember, a pullback to support doesn’t feel good but eventually matters, days like Wednesday are unlikely to occur with such drama. But, it is what it is and there is some major damage to the indices. Fortunately, the markets are very oversold and are due for a large bounce, but if support was blown through yesterday that means new resistance levels are created from that support.
The Internals
What’s it mean?
When we talk about the internals it is simply the health of the market. Much like having a cold, one can walk around the house maybe even outside and manage but eventually flu or cold symptoms start taking their toll on your. That pretty much happened here, with the internals again showing just awful numbers, all bearish. VOLD and ADD were hung out to dry, the VIX ripped higher, more than 74% while put/call rose up. Ticks were red most of the session but really clicked in during Powell’s presser. We’lll see if there is followthrough today..
The Dynamite
Economic Data:
- Thursday:Jobless claims, GDP revision, Philly Fed, home sales, leading economic indicators
- Friday:income/spending, PCE, consumer sentiment
Earnings this week:
- 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?
