U Turn

U Turn.  Stocks reversed course after a morning of selling with the S&P500 bouncing off the 2018 low close made back in April.  As the session began on an already weakened leg from Asian trade, news that Britain’s Prime Minister Theresa May was postponing a Brexit vote in Parliament hit the news feed. The postponement of the vote increases the probability that the worst-case scenario of forced exit without negotiation can occur.  That scenario would not be positive for the EU or Britain and traders sold on the news.  Traders were also contending with news that a Chinese judge was outlawing the sales of certain Apple products in China, which also released some economic numbers suggesting a slowing of their economy.  The Dow Jones Industrial Average was down over 500 points before lunch leaving it in desperate need of some good news. Enter the plunge protection team (the group of Administration officials who always seem to leak good but not necessarily real information when the market is weak).   News surfaced that Steve Mnuchin and Robert Lighthizer had a constructive phone conversation with their counterparts in China.  According to reports, they discussed the potential for China to begin purchasing US soybeans again.  China is the world’s largest importer of the commodity, and US producers have been hurt by the trade war.  Markets pivoted on the news trading up for a mixed close, leaving traders with hope that perhaps a turnaround from last week’s selling is underway.

Let’s take a quick run through some of the charts in my attached daily chartbook.  The S&P 500 traded below 2600 at one point during yesterday’s session but managed to close above it.  2600 is a key point of support for the index because it is a round number and markets bounced off that very level in late October.  The S&P closed just below its 2645 Fibonacci line, which will be its nearest point of resistance (chart 4).  The Vix index traded above 25 at one point during yesterday’s session and though it receded into the close, it is still at the higher end of its recent range indicating that volatility is still here (chart 5).  The Dow Jones Industrial Average traded below 24000 in the early part of the session but managed to close above.  The index will get support from its 24195 Fib line and resistance above from its 24722 Fib line (chart 6).  The Russell 2000, though it bounced off of session lows, never made it into the green and it closed down -0.34% for a low close of the 2018 (chart 7).  The lack of confidence in the small caps does not bode well for the overall health of the stock market and any longer term broader rally will require a turn around in this index.  The NASDAQ 100 was, not surprisingly, the winner in yesterday’s session managing to close up +1.05%.  Its support will come at 6596 and resistance at 6807, both Fib lines (chart 8).  All indices remain risk off.  Crude oil flashed some weakness as it was unable to sustain the positive price action that came after OPEC and friends announced that they would cut production to stabilize prices.  WTI will continue to receive support at the magical $50 level and moves below will impact the strength of equity markets (chart 11).  The Dollar strengthened yesterday in response to the postponed Brexit vote.  Administration would like to see a weaker dollar, which can be positive for US companies that export, but the currency continues to trade near annual highs due mostly in part to the US’ strong economy relative to its trading partners (chart 13).  In the fixed income world, we must first look at the state of the yield curve on chart 17… wait for it… enough said.  You don’t see a curve like that too often and debate rages on over inversion and what it means.  Corporate bond spreads continue to widen indicating an increase risk environment as traders require bigger yield premiums to take on the risk.  Two year treasury yields will start the session at 2.74% and ten year yields at at 2.88%.  Finally, I want to go back to chart 2, which represents trailing 60 trading days performance of some key sectors.  The only ones that have grown over the period are Utilities and Consumer Staples, with Utilities the clear winner.  Both sectors are defensive and tend to outperform when investors are expecting rough seas and the trend to defensive stocks is an accurate sign of investor sentiment.

Today, we get our first read of inflation with the Producer Price Index (PPI), which is expected to be flat for the month versus last month’s growth of +0.6%.  Annual growth is expected to be at 2.5% down from last month’s +2.9%.  Not including the volatile food and energy, PPI is forecast to have grown +2.5% year over year versus a prior reading of +2.6%.  These numbers can be market movers but equity trading will most likely continue to be influenced by discussions of trade, Brexit, interest rates, and to some small degree the yellow vest movement in France.  Please call me if you have any questions.

daily chartbook 2018-12-11