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12/19/2018 Investment House Daily
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Entry alerts: LULU
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- Market rises tentatively into the FOMC decision but Powell cannot tap dance.
- Stocks sell off the FOMC action, SP500, DJ30 breaking the early 2018 lows.
- FDX sees slowdowns in other economies that remind it of a severe recession.
- Tops are consummated, internals and technical are at extremes. A bounce will come, just the timing of the oversold release remains the issue.
Powell played the odds, hiked 25BP, lowered the 2018 anticipated hikes to 2 from 3, and lowered the Fed's construct of what is the neutral interest rate to 2.8%. Okay, that is a bit more dovish, not really satisfying the market, but perhaps Powell could tap dance his way through the press conference and make it all seem logical, sound, believable.
He could not. In what most considered an unartful press conference, Powell refused or simply was unable to present a good case to the market that the Fed, while still feeling rate hikes could be justified in 2019, is not set in stone that they will be necessary. For goodness sake, just say the Fed recognizes there is some slowing, but the economy is still strong so perhaps 2 more hikes in 2019. That said, the Fed would carefully watch the economy, and if it showed any signs of deterioration then the rate hikes would not happen. THAT the market could live with. THAT is not what the market got from Powell.
What is the seminal issue bothering the markets? At Jackson Hole, Powell talked a good game about getting away from models so dogmatically used by the Fed. He was somewhat throwing back to the Greenspan era in the 1990's where he went more free-form. Then came the October meeting and the further move back to the programmed modeling moves. What happened to the independent thinker? Perhaps he was never there.
The market reacted that way. Stocks edged higher into the announcement, but fell as the news hit. A modest bounce at the start of the press conference, then boom, they dove lower to the last hour. New selloff lows all around with SP500, DJ30 undercutting the early 2018 lows, NASDAQ trading right at those lows, SOX already at some 2017 highs where it is hanging on.
SP400 and RUTX continued their dive now deeper into late 2017 levels. Big tops breaking lower, a precursor to what the large cap indices are going to show.
SP500 -39.20, -1.54%
NASDAQ -148.22, -2.18%
DJ30 -351.98, -1.49%
NASDAQ 100 -2.29%
VOLUME: NYSE +19%, NASDAQ +12%. Both NYSE and NASDAQ 100 jumping well above average as investors sold stocks.
ADVANCE/DECLINE: NYSE -2.6:1, NASDAQ -3:1. Not massively negative.
NEW LOWS: NYSE 819, NASDAQ 822. It has been a long, long time since these kind of numbers showed up AND with NASDAQ beating NYSE on the new lows. They are, no doubt, extreme yet again, helping piece together an oversold condition.
Yes, the market is oversold. And as I have said many times, oversold conditions can get more and more oversold. What makes bounces is when the technical and sentiment elements all line up at extremes. Again, with the new lows, poor investor sentiment, put/call ratio getting so extreme the elements are lining up.
But, VIX has yet to breakout over the late 2018 highs and is not close to the February 2018 highs at 50 intraday (closed at 25.58 Wednesday). The VIX pattern is for a breakout with a triangle formation. That suggests a serious jump could be coming. Question is, will there be a bounce before that breakout?
Wednesday saw DJ30 and SP500 break below the early 2018 lows, NASDAQ recovering to hold them on the close. Okay, now the indices have not only broken the October lows but now the lows for the year. Time for algos to kick in for a reversal? Could be, and definitely something to consider. Markets never go down, or up, in straight moves.
So, an oversold bounce is still a possibility as the internals and sentiment indicators continue to hit more extreme levels. Leadership, however, remains weak at best.
Drugs were broken by JNJ. AGN, LLY, PFE -- pretty much all are in the dog house though MRK is not bad.
Food is having issues. MKC, the leader, broke the 50 day MA Wednesday. KO, PEP, MCD are at very important levels to hold. CMG is dead meat.
Personal products are still selling, e.g. PG, CLX, EL, CL.
Utilities: AEP continues testing though still over the 50 day EMA. Even the defensive stocks are not that defensive.
Software: Not bad. Again. TEAM holding the 50 day EMA nicely. VRSN holding nicely. GLUU. VMW, COUP ditto. Others, not so much, e.g. FFIV, CRM.
Chips: Even those holding up are so-so, e.g. XLNX, LSCC. AVGO is interesting at the 20 day EMA, but INTC, MU, AMAT sold off.
So, what is working? Damn little. Without leadership the market is in for a lot of selling, though punctuated with some rallies. Thus far, no rallies showing up.
Powell: +25BP, downgraded economy slightly, downgraded neutral rates to 2.8%, forecast 2 additional hikes. Of course, all is well with the economy. Much rejoicing.
FDX reported results that beat, but it lowered its entire 2019. The conference call noted that FDX was "very surprised by the magnitude of the headwind [for other economies] which is what night be seen in a severe recession."
FDX was referring to the rest of the world, not the US. The US has a golden opportunity, a once in a lifetime opportunity, to cement its economic position by using its economic leverage over faltering economies to win great trade deals with China and others. YET the Fed is set on upending the US economy as well and undermining our strategic advantage. Way to go!
Not that raising rates is horrid. Not at all. As I have written now for YEARS, however, the Fed should have started raising rates years ago. Instead, Bernanke then Yellen were too afraid to raise rates, wanting to goose the markets while they were in charge, all for history's sake, of course. Now, after a 9 year stock market run, the Fed decides to hike. Again, way to go!
Stats: -351.98 points (-1.49%) to close at 23323.66
Stats: -147.08 points (-2.17%) to close at 6636.83
Volume: 2.91B (+11.49%)
Up Volume: 501.91M (-818.09M)
Down Volume: 2.38B (+1.11B)
A/D and Hi/Lo: Decliners led 2.93 to 1
Previous Session: Decliners led 1.43 to 1
New Highs: 13 (0)
New Lows: 822 (+144)
Stats: -39.20 points (-1.54%) to close at 2506.96
NYSE Volume: 1.272B (+18.56%)
Up Volume: 298.764M (-185.356M)
Down Volume: 964.522M (+407.67M)
A/D and Hi/Lo: Decliners led 2.62 to 1
Previous Session: Decliners led 1.19 to 1
New Highs: 4 (+1)
New Lows: 819 (+82)
VIX: 25.58; 0.00
VXN: 29.43; +0.12
VXO: 26.42; +0.16
Put/Call Ratio (CBOE): 1.28; +0.19. About 10 straight sessions over 1.0 on the close. That is getting pretty extreme.
Bulls and Bears:
Minor fade on bulls after that surge the prior week from 38.3. Bears fell after finally breaking over 20; at least they held 20. They have converged more than anytime since 2016, but nothing that would suggest extreme. If anything, bears are still extremely low.
Bulls: 45.5 versus 46.7
Bears: 20.4 versus 21.5
Theory: When everyone is bullish and has put all their capital to work, where does the ammunition to drive the market come from? There is always new money to start a new year. After that is used will more money be coming? That is the question.
Bulls: 45.4 versus 46.7
46.7 versus 38.3 versus 39.6 versus 42.9 versus 42.5 versus 50.5 versus 51.9 versus 56.3 versus 61.8 versus 60.6 versus 59.0 versus 57.7 versus 60.1 versus 59.6 versus 57.7 versus 57.3 versus 54.9 versus 54.5 versus 54.9 versus 55.3 versus 52.4 versus 47.1 versus 47.6 versus 52.0 versus 55.5 versus 52.9 versus 50.0 versus 49.1 versus 46.6 versus 43.1 versus 43.6 versus 48.0 versus 43.6 versus 42.2 versus 49.5 versus 55.5 versus 54.9 versus 48.6 versus 48.1 versus 48.5 versus 41.9 versus 54.4 versus 66.00
Bears: 20.4 versus 21.50
21.50 versus 20.6 versus 19.8 versus 19.0 versus 19.8 versus 19.8 versus 19.0 versus 18.3 versus 18.5 versus 18.6 versus 18.3 versus 18.1 versus 18.3 versus 18.1 versus 18.3 versus 18.3 versus 18.6 versus 18.8 versus 18.6 versus 18.5 versus 18.5 versus 18.6 versus 18.4 versus 17.6 versus 17.8 versus 17.7 versus 19.2 versus 19.2 versus 19.4 versus 19.4 versus 20.6 versus 20.8 versus 19.6 versus 19.8 versus 18.6 versus 17.5 versus 16.8 versus 15.7 versus 15.5 versus 14.4 versus 14.6 versus 14.4 versus 15.5 versus 12.6 versus 12.8 versus 12.7 versus 13.5 versus 15.2 versus 15.1 versus 15.2 versus 15.1 versus 15.1 versus 15.4 versus 15.4 versus 14.4 versus 14.4 versus 15.1 versus 15.2 versus 15.1 versus 17.0 versus 17.1 versus 19.0 versus 20.2
Bonds: 2.762% versus 2.821%. Even with the Fed hiking rates bonds blast higher, extending the break through the 200 day SMA. LOTS OF FAITH (NOT) with the Fed's handling of the money supply.
Historical: the last sub-2% rate was in November 2016 (1.867%). 2.821% versus 2.855% versus 2.895% versus 2.913% versus 2.908% versus 2.884% versus 2.863% versus 2.854% versus 2.892% versus 2.915% versus 2.979% versus 2.993% versus 3.032% versus 3.061% versus 3.058% versus 3.059% versus 3.048% versus 3.065% versus 3.074% versus 3.056% versus 3.065% versus 3.116% versus 3.127% versus 3.147% versus 3.186% versus 3.239% versus 3.228% versus 3.222% versus 3.201% versus 3.22% versus 3.146%
EUR/USD: 1.13828 versus 1.13755. Surged through the 50 day MA but then faded to close flat.
Historical: 1.13755 versus 1.13533 versus 1.13049 versus 1.13604 versus 1.1376 versus 1.13244 versus 1.13657 versus 1.1404 versus 1.1376 versus 1.13970 versus 1.13360 versus 1.13199 versus 1.13934 versus 1.13682 versus 1.12973 versus 1.13325 versus 1.13380 versus 1.13829 versus 1.13818 versus 1.14484 versus 1.14172 versus 1.13308 versus 1.13264 versus 1.13124 versus 1.12348 versus 1.13475 versus 1.1364 versus 1.14329 versus 1.14228 versus 1.14090 versus 1.13881 versus 1.14019 versus 1.13394 versus 1.13455 versus 1.13760 versus 1.14042 versus 1.13757 versus 1.3972 versus 1.14682 versus 1.14626 versus 1.1538
USD/JPY: 112.521 versus 112.477. Holding support at 112.20.
Historical: Last below 109 in June 2018: 112.477 versus 112.653 versus 113.382 versus 113.634 versus 113.634 versus 113.385 versus 113.022 versus 112.66 versus 112.71 versus 112.813 versus 113.581 versus 113.474 versus 113.402 versus 113.559 versus 113.781 versus 113.510 versus 112.972 versus 113.007 versus 113.077 versus 112.617 versus 112.831 versus 113.585 versus 113.576.
Oil: 48.17, _1.57. Bounced after that nasty gap lower Tuesday. Still below the key 50 level broken on the Tuesday gap downside.
Gold: 1256.40, +2.80. Rallied through the 200 day SMA on the high then could not hold it. Still working upside.
The Fed is done, rates are higher, the Fed is still, purportedly, ready to hike into a falling market. The market reacted negatively to Powell's apparent recalcitrance, breaking to lower lows, with SP500 and DJ30 clearly breaking to 2018 lows. Internals and sentiment are at extremes. A few new items added to the list, e.g. the breaks below the early 2018 lows, still oversold and becoming more oversold.
A break below the early 2018 lows starts completing the top. That means the market is likely to sell a lot more over the next three to six months. The past three weeks are a breakneck dive to those levels, however, and with a breakdown after such a major selloff, you have to watch for a relief move to test the collapse.
We have some good downside positions working and will let them work. Upside positions are trimmed down but some still look very good, e.g. TEAM, VRSN. If they lead a relief bounce, awesome. We will let them move and look at playing a few more upside, e.g. AVGO, WDAY.
In sum, a market that is bigger picture in a yearlong top with more selling to come but will bounce sharply when the oversold conditions release. Still expecting the latter after this kind of torching downside, but it has yet to show itself.
Have a great evening!
End part 1
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