Stock markets opened strongly on Wednesday and even showed resilience in the face of mid-morning sell-off programs. Ultimately, however, the weight proved too heavy, the dam cracked, and US stocks closed weakly.
The Nasdaq Composite, after rising one percentage point, closed down 1.15% for the day. Not only that, the Nasdaq Composite closed below its 200-day simple moving average (SMA) for a second straight day, while failing to make contact with that line for a first day. Is it important? It might be.
If the Nasdaq Composite finds support and stays close before rallying to some or any catalyst, all would quickly be forgotten. The longer this index remains below the 200-day line, the easier it becomes for risk managers to force portfolio managers to reduce their exposure. The index closed Wednesday 11.5% below its November high and went two months without setting a new record.
The S&P 500 fell just under a full percentage point for the session and closed at the low end of the day’s range for a second consecutive session. Additionally, the broadest of the large-cap indices closed below its 50-day SMA for a third day in a row, and without making contact with that line. Of course, the S&P 500 is less tech-focused than the major large-cap Nasdaq indices and managed to hit a new high in early January as some managers shifted stock allocations from growth types to value. The S&P 500 is now 5.9% below that January 4 intraday peak.
Looking beyond large caps, the Russell 2000 took a serious beating (-1.6%), closing a ninth day out of 12, dragging its 50-day SMA below its 200-day SMA, creating what the is called a ‘cross of death’. This is often seen as a bearish signal and can create an algorithmic reaction for large cap indices. Luckily (no promises), looking back it seems as if this phenomenon often happened just before a big drop. of this index, this decline has often bottomed out, causing prices to rise within weeks or months. Again, no promises. The monetary, and fiscal environment, not to mention the state of public health conditions are in very different effect this time.The Russell 2000 peaked in early November and closed Wednesday 16.1% below that level.
Still not nervous
I hear other traders talk about “needing” a washout or a flush in order to find a bottom. I just don’t see any sign of impending surrender. Not that the markets won’t be able to find a short-term bottom here or there. Beijing slashed interest rates again overnight, after apparently doing so a few weeks ago. This put a bid under the Hang Seng as well as other Asian markets. European stocks opened well, then sold quite sharply before finding a bid close to the “unchanged” mark. US stock index futures are looking positive. Again, I write this several hours before the opening bell in New York. A lot can happen by then.
Let’s come back to the interpretation of this almost confounding absence of fear. I understand that algorithms don’t have emotions or the instinct to act on their “hunches” like humans used to do, but there have been many cases in the past where algorithmic mass execution n only increased volatility and forced a huge directional overshoot. That may be the case right now.
Are indices overreacting at these levels? Are the markets pricing in some level of likelihood of martial activity in Eastern Europe?
The VIX is elevated, relative to its 50-day and 200-day SMAs, but rising over the past two years, these levels hardly raise eyebrows.
The same can be said for the total put/call ratio of CBOE options. Slightly high against its moving averages, in fact lower this week than last time.
In fact, just look at where the put/call ratio for the index came out on Wednesday. Safe to say people aren’t exactly terrified.
Glimmers of hope?
While the magnitude was pretty awful again on Wednesday, with losers beating winners at the NYSE by about 9-4 and at the Nasdaq market site by more than 2-1, and while increasing volume was only 30, 7% of the total for NYSE-listed names and 31.7% for Nasdaq-listed names said volume was actually…light on Wednesday.
Composite trading volume fell 5.8% for NYSE-listed names on Wednesday from Tuesday. The one-day drop in activity was even more notable (-8.7%) for Nasdaq-listed stocks. Names subordinate to both the S&P 500 and the Nasdaq Composite also failed to reach their respective 50-day trading volume on Wednesday.
None of this takes into account the fact that nine of the 11 SPDR ETFs selected by S&P sector were red for the session, with two “defensive” type sectors in the green and two “cyclical” type sectors at the bottom. If you bought them, you still bought them and if you sold them, you still sold them. This tells me, however, that on Wednesday at least, professional capital was indeed much less aggressive than it had been on Tuesday.
Why is that? Capital always flowed elsewhere. Bond traders bought from the middle to long end of the Treasury spectrum. Yields fell from the US 2-year to 30-year as traders sold the short term. There was no real love for anything from the United States of a year to 30 days.
Has anyone else wondered if the market may have been bracing for a “dovish” surprise from the Fed? I know, I understand. Inflation is way too hot. But understand this: in a semi-normal to normal economic environment, central banks can and will impact inflation (and growth) through monetary policy. One thing the Fed, or any central bank, cannot do is correct the shortage through the implementation of any type of policy.
Listen to me. I’m not dovish right now, at least not yet. Will higher interest rates get goods to seaports? Slow covid? Ease of travel? Find valid employees for employers in need? Higher rates will certainly reduce the existing potential for wage growth. Of that I am certain.
Although the change in the path of monetary policy certainly has an impact on the directional economy, that is, in an economy where there are more give-and-takes than in this one. Helicopters drop you alone in a strange place, you don’t waste water. Not a drop. Someone could offer you a million dollars, you’re not selling your water. Same design. The forces involved may be less elastic than many economists currently assume.
What happens if this sudden deceleration in economic activity observed at the end of the fourth quarter and the beginning of the first quarter persists? These helicopters are not coming in for some kind of mass fiscal bailout like they have since the start of the pandemic. Of course, we have an infrastructure bill that has been signed into law. Household support, however, is over. This equates to a big drop in consumer demand. Perhaps less demand for goods and services ultimately equals less demand for labor. Maybe the Fed wants to take this slower than the markets anticipate.
My suggestion? (This is for you, Jay) Open the door to a less hawkish future on January 26. Always go ahead with a 25 basis point increase in the March fed funds rate target if possible, while keeping all options open. Work more on the balance sheet than on short-term rates for at least the second and third quarters of 2022. There is a very good chance that the inflation produced by the scarcity will only decrease when the scarcity itself decreases. Use the balance sheet to maintain a healthy yield curve if the economy continues to slow.
Does this mean outright selling stocks at the long end of the curve? Or in the stomach? This means, do the right thing, even if maintaining the slope of the curve requires buying Treasuries.
Operation Twist amundo? Food for thought. We don’t have to panic. So cool.
Economy (all Eastern times)
8:30 a.m. – Initial unemployment insurance claims (weekly): 209,000 expected, 230,000 last.
08:30 – Continuing complaints (weekly): Last 1.559M.
08:30 – Philadelphia Fed Manufacturing Index (January): Expected 19.6, last 15.4.
10:00 a.m. – Existing Home Sales (December): Expecting 6.42M, last 6.46M SAAR.
10:30 a.m. – Natural gas inventories (weekly): Last -179B cf.
11:00 a.m. – Oil inventories (weekly): Last -4.553M.
11:00 a.m. – Fuel stocks (weekly): Last +7.961M.
The Fed (all Eastern times)
Highlights of Today’s Earnings (PSE Consensus Expectations)
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