Weekly Market Analysis – 31 December 2018 BMO

WEEK IN REVIEW – 24 to 28 DECEMBER 2018 :
Stocks Bounce in Wild Roller Coaster Ride

The S&P 500 rallied 2.9% during a week that featured its worst Christmas Eve in history, a historic rally, and a stunning reversal in late trading action. Wall Street’s end-of-the-year Santa Claus rally, which began taking shape on Wednesday, has pared the benchmark index’s monthly decline to 9.9%.

The Dow Jones Industrial Average (+2.8%), the Nasdaq Composite (+4.0%), and the Russell 2000 (+3.6%) also cut their monthly losses to 9.7%, 10.2%, and 12.7%, respectively.

Nine of the eleven S&P 500 sectors finished the week with gains with consumer discretionary (+4.7%), information technology (+3.7%), communication services (+3.6%), and financials (+3.3%) leading the advance. The utilities (-1.9%) and real estate (-0.1%) sectors were the lone groups to finish with losses.

Investors had to wait for the rally, though. The holiday-shortened trading week began with a continued effort to reduce exposure to risk, which left Wall Street with little Christmas joy.

Nevertheless, the belief that the market had become deeply oversold, in conjunction with rebounding oil prices, strong holiday sales, and some short covering, helped drive the S&P 500 to its best one-day gain (+5.0%) since March 2009.

What ensued was an unsurprising inclination to sell into strength. What surprised many, however, was the reemergence of the buy-the-dip mentality that carried stocks from steep losses to notable gains in the same session. Many attributed the late reversal to pension fund rebalancing activity, but short-covering and a rush of speculative buying interest likely played a contributing role in turning things around in such a hurry.

More so, the ability to hold up this week in the face of bad news, which included the partial government shutdown, softening economic data, and the European Central Bank highlighting an expectation for slower global growth in 2019, added to the bull case for a sustainable rebound heading into 2019.

The bond market, though, signaled a more cautious-minded mentality with risk-free U.S. Treasuries remaining resilient to selling efforts. The 2-yr yield declined nine basis points to 2.52%, and the 10-yr yield declined five basis points to 2.74%. The U.S. Dollar Index fell 0.6% to 96.34.

Investors will not receive any notable economic data on Monday, which will be a full day of trading on Wall Street.

U.S. ECONOMIC UPDATE
(Economic Excerpts from Briefing.com)

Wednesday 26 December:

Analysis delayed due to partial government shutdown 

October Case Schiller Home Price Index 5.0% vs consensus of 5.0%; September was revised to 5.2% from 5.1%

Thursday 27 December:

Initial claims print better than expected

Initial claims for the week ending December 22 decreased by 1,000 to 216,000 (consensus 225,000) while continuing claims for the week ending December 15 decreased by 4,000 to 1.701 million.

The key takeaway from the report is that initial claims continue to print at low levels that don’t suggest any meaningful softening has occurred in the labor market despite the concerns about a slower growth outlook.

October FHFA Housing Price Index grew 0.3% M/M vs. +0.2% in September 

Consumer Confidence Registers Another Pullback in December

The Conference Board’s Consumer Confidence Index decreased to 128.1 in December (consensus 133.7) from a revised 136.4 (from 135.7) in November.

The key takeaway from the report is that consecutive declines in the Expectations Index point to a growing belief that the pace of economic growth will decelerate in the first half of 2019.

Friday 28 December:

Chicago PMI Ticks Lower in December

The MNI Chicago Business Barometer, colloquially known as the Chicago PMI, decreased to 65.4 in December from 66.4 in November. The December pullback took place after the Index soared by nearly eight points in November.

The key takeaway from the report is that the overall reading remained elevated thanks to strong order backlogs and an increase in the Production Index.

KEY ECONOMIC DATA UPDATE
FOR ASIA-PAC & EUROPE

Asia-Pacific

Europe

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Friday 28 December
Stocks Trade Mixed to Close Volatile Week

The S&P 500 lost 0.1% on Friday in what was another whipsaw day of trading that saw the S&P 500 up as much 1.3% at its high and down as much as 0.6% at its low. The benchmark index finished a remarkably volatile, and history-setting, week with a gain of 2.9%.

The Dow Jones Industrial Average (-0.3%), the Nasdaq Composite (+0.1%), and the Russell 2000 (+0.5%) also experienced roller-coaster action on Friday and finished with weekly gains of 2.8%, 4.0%, and 3.6%, respectively.

Price action was relatively tame (for this week anyway) after the S&P 500 fumbled an early rally effort shortly after the start of trading. However, at around 1:30 p.m. ET, the benchmark index climbed from a loss of 0.2% to as high as 1.3% without any news to account for the move.

All sectors were up and all major indices were higher.

Nevertheless, stocks would retreat just as quickly as they had climbed with no news catalysts to account for the subsequent downturn either.  It was perhaps fitting that the S&P 500 ended the session close to where it started as that was an accurate reflection of the lack of conviction that characterized today’s trading action.

Efforts to flatten out positions in front of the weekend, which could be a four-day weekend for many (the market is open December 31 and closed January 1) were likely responsible for some of the late-day selling.

The S&P 500 sectors finished mixed with energy (-0.9%) and materials (-0.6%) underperforming the broader market. Conversely, the consumer discretionary (+0.3%) and real estate (+0.2%) sectors outperformed.

U.S. Treasuries remained resilient to selling pressure with the 2-yr yield and 10-yr yield decreasing one basis point each to 2.52% and 2.74%, respectively. The U.S. Dollar Index lost 0.1% to 96.34.

Market Internals – Friday 28 December 2018

Dollar: Lower for the week, up for the year

The U.S. Dollar closed lower for the week at $96.39 from $96.95 the previous week. For the year, the Dollar gained 4.92%.

Other currency pairs;

Bonds: Treasuries Edge Higher, but Long Bond Lags

US Treasuries ended the week on a mixed note as most tenors recorded slim gains while the long bond settled in the red. The Treasury complex started the day in negative territory, but the lower open was followed by a swift rebound that had 10s and 5s trading in the green just two hours into the cash session. The long bond also made a brief appearance in the green, but that’s where resistance was found, pressuring the 30-yr bond back to its starting level. Shorter tenors, meanwhile, continued their advance into the early afternoon, hitting fresh highs for the week in the process. The 10-yr note finished at its best level since early February while 2s and 5s settled at their best levels since the start of June. The slope of the yield curve was little changed today, but it steepened during the week. The 2s10s spread ended the week six basis points wider at 22 bps while the 2s30s spread widened by 12 bps to 52 bps.

The yield curve steepened as shorter maturities rallied to send their yields down while the 30 year yield popped 1bps. The spread on the 2s5s is 5bpsThe spread between the 5s10s widened to 17bps from 15bps the previous week while the 10s30s narrowed to 30bps from 24bps the previous week. The spread that matters most, the 2s10s, widened 6bps to 22bps from 16bps the previous week.

Looks like we’re holding off an any sort of inversion the curve for a while more, thus theoretically giving the risk markets more headroom in the months to come. 

Commodities 

The Bloomberg Commodity Index settled at 77.59, lower than 78.70 the previous week as Energy and Grains lost more ground.

WTI oil closed at $45.33 p/b, lower than the week before at $45.59. The spread between WTI and Brent widened to $6.87 from $8.23 the previous week as Brent settled at $52.20 p/b.

EIA petroleum data for the week ended December 21

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) remained virtually unchanged from the previous week. At 441.4 mln barrels, U.S. crude oil inventories are about 7% above the five year average for this time of year. Total motor gasoline inventories increased by 3.0 mln barrels last week and are about 4% above the five year average for this time of year. Finished gasoline remained the same, but blending components inventories increased last week. Distillate fuel inventories remained unchanged last week and are about 11% below the five year average for this time of year. Propane/propylene inventories decreased by 1.0 mln barrels last week and are about 5% below the five year average for this time of year. Total commercial petroleum inventories decreased last week by 2.0 mln barrels last week.

Natural gas inventory showed a draw of 48 bcf vs a draw of 141 bcf in the prior week. Working gas in storage was 2,725 Bcf as of Friday, December 21, 2018, according to EIA estimates. This represents a net decrease of 48 Bcf from the previous week. Stocks were 623 Bcf less than last year at this time and 647 Bcf below the five-year average of 3,372 Bcf. At 2,725 Bcf, total working gas is below the five-year historical range.

Baker Hughes total U.S. rig count increased by +3 to 1083 following last week’s increase of +9.

Metals: Gains across the board

Agriculture:  Grains lose more ground

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THE MONTH AHEAD
January 2019

January 2019 has 21 trading days and two public holidays. January is the first month of Quarter 1 that sees the start of Earnings Season for Q4 Results beginning on the second week of the month. January is the third month of DOW’s and S&P’s “Best Six Months” of the trading calendar and the last month of the year’s best three month for S&P gains.

January usually starts out mildly bullish but becomes very bullish mid-month and ends rather flat and sometimes bearish. The month is famous for its January Barometer Indicator where “As January goes, so goes the year” with an 87% accuracy. Every down January on the S&P500 has preceded a new or extended Bear Market, a flat market or a 10% correction without exception since 1950. January’s “First Five Days” have indicated a full year of gains 84% of the time.

TRIVIA

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THE WEEK AHEAD
Week 01 (December 31 to January 04)

According to our 5, 10 and 15 year seasonal models (Tuesday 01 January 2019 is a Holiday);

Benchmarks Indices (21 year average) for wk01:

Week 01 Key Economic Dates

Another week that’s light on data but Friday will be a hive of activity as the New Year kicks into gear with the January Non-Farms Payroll number and Fed Speak.

Sun 30 December

Mon 31 December

Tue 01 January

Wed 02 January

Thu 03 January

Fri 04 January

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

COMMENTARY
2019 PREVIEW

I am holding to the opinion that this is still only a correction, the one that was long overdue and expected. All the talk of an economic slowdown or recession have been nothing more than speculative projections by Wall Street and some cautious corporations … But for now, the numbers don’t say it. For now, this is just another correction.

The market made a valiant effort – albeit on much lower volumes –  to recover its losses for the year. However, it seem very highly unlikely that the DOW can recover 1,657 points (6.7%) in the single remaining session on Monday. Neither will the S&P500 regain its 188 points (7.1%). It might be possible for the NASDAQ to claim 319 points (4.6%) in a single session but …

The index that really matters to me, the Transports, need to recover 9.7% on Monday to breakeven for the year. I doubt that will happen seeing that it struggles to make 10% in a single quarter under normal conditions.

SELF-FULFILLING PROPHECIES, YIELDS AND FFR

The Bulls are hanging on the hope that a Santa Claus Rally could bring the market out of this funk. I have to say, it is looking hopeful at this rate. If it happens by 3rd January, then another bullish prophecy will be in play; that the third year of the President’s term is a bullish year. This adds to the (skeptical) bullish Black Friday/Cyber Monday  sales that points to a bullish year ahead. The only downer is that the market didn’t sell off in May – that usually means that greed suffers the following year.

Now that the Yield Curve seems to be steepening again after that brief false alarm, the market should be good for more upside until the curve says otherwise. The spread between the 10yr bond yield and the Fed Funds Rate is 24bps wide and converging quite a bit. If the Fed hikes the benchmark rate up to 2.75% in January and the 10yr maintains the status quo, this could be an early warning signal that everything is about to change again. If the spread remains, then we can still look forward to more upside … or at worst, not see more downside.

Oil remains my bread-and-butter and I think it should range between $42 and $55 for most of the coming year unless we get confirmation of a recession that will send the black stuff lower.

Gold should make higher highs. Resistance for now is at $1,320 with a higher 52week high just below $1,400. Should the metal rise, I’ll be counting the months (up to five) in anticipation of a market capitulation if the macros are convergent. Check back with this in May 2019.

BTC (Disclaimer: I am highly prejudiced about this) should see more downside to break below $3,000 within the first half of 2019. Support should hold above $2,500 but a break below that in the second half of the year should see it get down to $1,200. Remember, there is no way to value BTC fundamentally. I don’t trade this so this is my license to be irresponsible about my call on BTC. But I still hold my call for BTC to be no higher than $300 in the long term. So far, I’ve not been wrong about crypto since it popped up above $1,000 in January of 2017.

SINGAPORE UPDATE

The STI looks set to finish another disappointing year for the 8th year running since 2010. The local benchmark index looks set to close out the year -10% down in Correction Territory and under its 50/200 DSMA Death Cross, having breached its critical 3,100 support in October. Macro-economic numbers are suggesting that the island-state is heading for a slowdown/recession in the coming year in spite of a seemingly healthy GDP. Interest rates keep rising in spite of the lower Inflation Rate while Manufacturing and Retail Sales keep falling. The Government Budget is practically non-existent, Government Spending has decreased and Consumer Spending increased only because of higher transportation costs, utility costs and fuel costs. This, as I’ve said before, is going to be a long haul pain ride.

SUMMARY

At the start of 2018, I said that I was expecting a “troublesome year” ahead that was going to either be very volatile or very flat – we got both at different times of 2018. But I never saw that year-end sell-off coming. That was a bonus! It might be too soon to say this but we finally got that correction we’ve waited so long for. Are we there yet? Maybe, but I’d rather wait for a clearer picture before I commit to making bullish calls.

For now, I reckon 2019 will see some upside by the end of the year but not without some major rocking and rolling before we get there. Recession? That’s something we’ll just have to wait and see because there’s nothing on the six-month horizon to suggest it yet. All in all, I am still bullish in the long term, albeit very cautiously bullish while holding a short-term bearish attitude until this correction is done and dusted. I will be sticking with my usual oil trades and seasonal portfolios but they will be hedged until I get an “all-clear” from the market and economic data. 

In the meantime, I’d like to wish all my readers a very Happy and Profitable 2019 ahead. 

Happy Hunting!

~~~~~~~~~~~~~~~~~~~~~~~~~~~

PATTERN TRADER™ TUTORIAL 
INTRODUCTORY WORKSHOP

Date: 9th January 2019, Wednesday
Time: 07:00PM to 10:00PM
(Registration starts at 06:30PM)

…..

For more than 13 years of educating, mentoring and supporting hundreds of participants (annually) in the arts and sciences of Finance and Economics, the Pattern Trader™ Tutorial has evolved to become the most sought-after boutique-styled class that caters to individuals, professionals and families that are serious about their finances and their prospects as we move into the future.

The small class environment and tutorial-styled approach gives the Tutorial a conducive environment that allows for close communication and interaction between the mentor and the participants.

The hands-on style makes the Tutorial very practical for anyone who requires a start from the ground up. It is the perfect beginning for anyone who wishes to take that first step in improving their financial and economic literacy.

If you’re looking to make a huge difference in your financial life and get the most value our of your education investment, there’s no better choice than the time-tested and well reputed Pattern Trader™ Tutorial.

Register for the Introductory Workshop NOW!

Download our promo slides here:
The Pattern Trader™ Tutorial 2019

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

The schedule for the FEBRUARY 2019 Batch is here:
Pattern Trader™ Tutorial – February 2019

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Screen Shot 2017-10-01 at 1.38.39 PM

Connect with me at LinkedIn

Share

If you enjoyed this post, please consider to visit Pattern Trader Tools, leave a comment or subscribe to the feed and get future articles delivered to your feed reader.

Comments

No comments yet.

Sorry, the comment form is closed at this time.