The Fuse
Equity futures are getting knocked down again as yesterday’s faux rally dissipated. Today we’ll have the PCE report, an important one for the Fed and a big options expiration which is likely to bring heavy volume. A worry now is if the government will shut down or not.
Interest Rates are coming down a bit this morning as bond buyers are present. Notably, this is probably some short covering here as yields on the long end of the curve continue to trend higher. Fed funds futures are leaning towards a more static Fed policy the remainder of the year, seeing fewer than 3 cuts.
That could go down even more soon.
Stocks in Europe were lower, down .9% on the STOXX. The dollar also fell, gold is up but crude oil is off a bit more than 1%. 10 yr US treasury yields were down 2bps, German 10 yr bund yields flat. In Asia stocks were lower, Japan off by .3% while in Hong Kong and Shanghai smaller losses.
Earnings from FDX were a miss (on revenue) but the markets got excited over their spinoff announcement. Nike beat but offered poor guidance, that stock is down 5%.
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.
Breadth has been the story for December and it is not a good one for the bulls. Eventually the avalanche of selling is going to hit hard, because stocks just cannot continue upward if money is not flowing to them. .
Volume remains on the high side as more and more selling continues to move markets toward the lower end of the session. Very poor liquidity here and as such violent moves up and down. We could see an avalanche of volume hit the tape today, this being a massive options expiration. This could be the highest volume day of the year.
Some testing of support yesterday but not too convincing. Certainly the pullback on Wednesday was unexpected but we had been warning of drifting too far away from support for too long. The risk of course is a very quick and painful move down such as we experienced this week, and now the damage to that move is to be assessed. Will the markets bounce here? Yes, it appears likely but the selling needs to abate first.
The Internals
What’s it mean?
The weight if the internals is heavy. Not only were the statistics and indicators weak Wednesday, but even oversold reading was not enough to turn the markets upward. The weakness in VOLD and ADD continues, look at the octagon top left to see what I mean. Just the last few sessions tell the story. Put/calls are on the rise too, and that means more selling is likely from those getting nervous. VIX remains elevated and is above 25%. TICKS were red most of the day, heavy sell programs.
The Dynamite
Economic Data:
- Friday:income/spending, PCE, consumer sentiment
Earnings this week:
- 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?
