FAANGS Out!

FAANGS Out!  Count Dracula would have been proud yesterday as the FAANGS led markets higher in a Halloween rally that capped off a spooky month for investors.  Facebook sparked the fire and was up +3.8% and the sharp upward move was followed by Amazon (+4.4%), Apple (+2.6%), Netflix (+5.6%), Alphabet/Google (+3.0%).  Strong earnings and investors’ penchant for the comfort trade helped stoke the rally.  Oh, and GM also reported really strong earnings, which also helped all things non-tech pop as well.  Then there was the ADP employment number that came out showing a larger than expected surge in new hires and is thought to be a prelude to tomorrow’s much-awaited government employment figure. While the two day rally offered slight relief for worried investors, the month was still ugly with the Dow Jones giving up -5.07%, the S&P500 relenting -6.94%, and the small cap Russell 2000 ceding -10.91%.

From a technical perspective, the S&P 500 is still below its 200 day moving average but it is above 2700 and it did manage to gain some ground trading through resistance from its 2696 Fibonacci line, which will now serve as its support (see chart 4 in my attached daily chartbook).  The Dow Jones Industrial Average traded above its 200 day moving average intraday but closed slightly below it.  The 200 SMA will become the magnetic point for the Index as it attempts to claw back some gains (see chart 6 in my attached daily chartbook).  The Russell 2000 bounced off of its 1525 Fibonacci resistance line, closing up for a second consecutive session.  Closes above 1525 will be critical if the recovery is to be sustained (see chart 7 in my attached daily chartbook).  The NASDAQ 100, which rose +2.31% yesterday flirted with its 200 day moving average but it was unable to overtake it nor was it able to close above 7000.  Both of those levels will serve as resistance and its 6903 Fibonacci line will provide support (see chart 8 in my attached daily chartbook).  All of the S&P, Dow, NASDAQ, and Russell 2000 remain risk off.  Bonds continue to remain stable but for lower quality paper, which has been risk off with spreads expanding (see bottom panel of chart 17 in my attached daily chartbook).  Higher yielding bonds (AKA Junk Bonds) are like hybrids between stocks and bonds and they tend to trade more like equities, though they are still bonds in the classic sense.  In fact they often serve as a good leading indicator for equities.  So the big question remains?  Does this last 2 day rally mark the bottom of the recent correction in stocks?

We cannot ignore the fact that all of the recent economic indicators, most recently ADP Jobs and consumer confidence, indicate strength in the economy.  Likewise with earnings that continue to show strong results.  That said, there remains a strong case for the Fed to continue to raise rates, albeit carefully.  Additionally, the effects of the trade war with China is just beginning to show up in corporate earnings and they will only get bigger and more impactful if a resolution is not reached quickly.  Finally, it must be noted that the positive earnings impacts from last years tax package will start to wane in the fourth quarter.  So headwinds still exist.  However some more good earnings (Apple would really help if it has a strong release after the bell tonight) combined with stock buybacks which will start up again soon can help stocks regain their footings.  Next week’s election remains a wild card.  Though it should not technically affect the markets no matter what the outcome, it will certainly add some volatility to an already jumpy market.

Today, we get a number of earnings releases prior to the market opening including a number of potential market movers.  This morning we will also get Manufacturing PMI (55.8 versus last month’s 55.9), ISM manufacturing (expecting 59.0 compared to last month’s 59.8), and construction spending which is expected to be flat month over month.  The VIX index will start the session at 20 (above 18 is not good) and equities look like they will start the session on a strong leg after trading up overseas, so all eyes will remain on earnings and numbers.  Seatbelts should still be fastened, for now.

daily chartbook 2018-11-01