After Tuesday’s Rally Fizzled, Optimism Surges On China Trade Hopes

After yesterday’s rally attempt fizzled, U.S. stocks had a positive tone early Wednesday amid more hopes for trade progress with China. At the same time, Britain could be a factor today as Prime Minister May faces a possible no-confidence vote over Brexit.

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5 min read

Key Takeaways

  • Another rally attempt appears likely as China trade sentiment on the upswing

  • British politics take center stage as no-confidence vote looks possible

  • Volatility edges lower while crude and overseas markets all on the rise

(Wednesday Market Open) If at first you don’t succeed…

That seems to be the attitude Wednesday, with Wall Street apparently aiming high after an early rally fizzled yesterday. Once again, ideas that trade talks with China might yield some fruit appeared to be the motivating factor, in part because of comments by President Trump and reports that China might loosen restrictions on auto imports. Trump said he might be willing to intervene in the criminal case of a top Chinese executive arrested last week if it would help reach a trade deal. That statement seems to be giving the market new hope.

Yesterday’s rally attempt got scotched for a bunch of reasons (see more below), and it’s unclear if the early strength today has more gusto. One negative overhang could be concerns about Britain. A leadership challenge to Prime Minister Theresa May seems possible, according to media reports, after she postponed voting on a Brexit measure earlier this week. Despite that, European and Asian markets all traded higher early Wednesday, and crude, gold, and U.S. Treasury yields were on the rise as well.

Another market doing a bit better, even though it hasn’t gotten much attention, is the Nasdaq Composite (COMP). It’s really been outperforming, up eight out of the last 11 days and clawing back from a couple of drops below the psychological 7000 mark. This appears to be getting lost amid all of the hand-wringing over market weakness, partly because the “up” days have been small and the “down” days have been large. Still, the COMP is hanging in there, and if anyone is looking for hope, that could provide some. Remember, the Nasdaq is home to many info tech names, as well as a big chunk of biotech companies. These tend to be stocks people buy when they’re enthusiastic, rather than defensive. 

Inflation data early Wednesday didn’t appear to suggest reasons for investors or the Fed to worry about overheating in the economy. The consumer price index (CPI) for November was flat, with core CPI (which strips out food and energy) up 0.2%, as Wall Street analysts had expected. Year-over-year CPI slipped to 2.2%, from last month’s 2.5%, while core CPI rose 2.2% year-over-year, up from 2.1% in October. Treasury yields moved slightly higher after the data, which seem to indicate a firm economy but inflation staying in check. Lower gas prices probably factored into the flat headline reading.

Choppy Ride To Nowhere

If the market had a mantra Tuesday, it arguably could have been, “wide range, not much change.”

It was a topsy-turvy day. The S&P 500 (SPX) shot up more than 1% right after the open to early highs around 2674, then plunged 50 points before slowly clawing back the rest of the session. It actually won back some of its gains before weakness in the last 15 minutes took it into the red. The Dow Jones Industrial Average ($DJI) acted pretty much the same, skidding to 100-point losses after nearly 400-point gains before closing just under the flat line.

Some of the volatility might be chalked up to politics, with morning news dominated by a televised, tense meeting between President Trump and congressional Democratic leaders ahead of a possible government shutdown at the end of next week. Even if that happens, however, it’s not likely to be a big factor for the markets. Basically, there’s a “been there, done that” kind of feeling on Wall Street when it comes to shutdowns. They usually don’t last long or have much impact on corporate earnings.

However, the political wrangling Tuesday might have some investors worried about whether Congress and the White House can work together starting next year when Democrats take over the House of Representatives. Although one theory holds that political stalemates can be helpful for stocks, there’s a sense that some things need to get done in Washington this coming year, including a replacement for the North American Free Trade Agreement and possible action on infrastructure. Cooperation between Congress and the president would be required for those potentially market-friendly things to happen.

Speaking of politics, there was some positive news on the China trade front Tuesday as Bloomberg reported China would consider lowering a tariff on imported cars. The move would reduce tariffs on U.S. cars to 15% from 40%, Bloomberg said, but the step hasn’t been finalized and could change. Shares of General Motors (GM), Tesla (TSLA), and Ford (F) all accelerated after those headlines. Positive or negative news on trade could continue to be the biggest factor driving markets.

Stronger Moves Late in Session Worth Noting

There’s been a slightly more bullish feeling lately, even though volatility remains a big part of the story as seen by the 500-point range in the $DJI on Tuesday. The bullish part is that during most of the last week (with the exception of Friday), some buying came in at the lows to help bring major indices back from sharp losses. That’s the opposite of late last summer when suddenly the SPX couldn’t maintain early-session gains even as it traded near all-time highs. Back then, the market looked a bit tired, and the sharp drop of “red October” followed. If “buying the dip” gets popular again, that could be a sign of the indices carving a bottom, but we’ll have to wait and see.

Another positive sign, maybe, is that the closely watched VIX “fear index,” down moderately early Wednesday to around 21, hasn’t chased recent highs near 25 despite wide daily price swings in stocks. If these swings were accompanied by VIX heading to 25 or above, it might be a sign that traders sense more trouble ahead. While you can’t discount the possibility of another sell-off on any given day, the modest movements in VIX seem to suggest that there’s less fear among investors about major shocks in the coming weeks. One school of thought is that 25 might represent a near-term ceiling for VIX, though it’s never safe to predict.

Financials Bring Up Rear Despite Yield Rise

In another potentially positive development, 10-year Treasury yields tracked slightly higher Tuesday to end the day near 2.88%, and reached 2.89% early Wednesday. Despite that, financial stocks continued to struggle and finished last on the sector scoreboard Tuesday. One possible factor pushing financials down could have been anticipation of a weak or negative CPI reading, which would probably provide more ammunition for economists who think the Fed should take a dovish stance on rates.

While financials continued to flag, info tech had another solid day Tuesday despite Alphabet (GOOG, GOOGL) executives sitting in the hot seat in a congressional hearing on privacy and data collection.  Several of the “FAANG” stocks were in the green Tuesday, continuing the modest strength seen Monday, while Microsoft (MSFT) and Micron (MU) also had solid sessions. Shares of Apple (AAPL) continued to lag and fell back below $170 a share, where there’d been some sign of support Monday.

Still, consumer staples, a “defensive” part of the S&P 500, easily led all sectors in gains Tuesday. That could be a sign that the “risk-off” attitude hasn’t gone away. Health care and real estate also moved higher. The health care sector is quietly having a very strong year, up nearly 10%. Industrials and materials both slipped despite the seemingly positive China trade news.

Another sign that we could be a ways from getting out of the woods is a sedate crude oil market. U.S. crude prices continue to trade under $52 on Tuesday despite last week’s OPEC and Russian production cut agreement. The output pact seems to barely have given crude any vigor at all, which could be a sign that demand remains weak or that record production and huge stockpiles continue to keep prices from getting much traction. A rally in crude, if it comes, might indicate economic strength. Crude climbed above $52 early Tuesday as supply worries in Libya continued, media reports said. Weekly U.S. stockpile data are due this morning.

Figure 1: The Yields Are High, The Yields Are Low... No matter where the 10-year Treasury yield (purple line) has gone over the last three months, it seems like S&P financials (candlestick) haven’t gotten much benefit. Back in early September, when the yield was last around the current level, financials were well above current levels, and they fell even as the yield rose to decade highs by early October. Since then, yields have fallen back toward their summer lows, and that seems to have added to the grief in financials. Data Sources: S&P Dow Jones Indices, Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Bulls’ Eye On Housing: Like the markets, the economic winds sure shift quickly sometimes. Seems like just a few weeks ago there was a lot of talk about how rising mortgage rates could weigh on the housing market, with side effects hitting home builders and home renovation companies. Homebuilding stocks were hitting new lows for the year. Now, with 10-year yields back below 3%, there’s actually some talk about a possible lift for the home market from lower rates. That remains to be seen and isn’t something that’s really going to be observable until a few more months of housing data are in, assuming mortgage rates don’t budge further. The November readings on building permits, existing home sales, and housing starts are due next week.

On another housing-related note, The New York Times noted that the housing price rally that began in 2012 after the last recession has raised existing home prices about 40%, adjusted for inflation, in less than seven years. That’s the third-strongest national housing boom in a century, but well behind the one seen between 1997 and 2006 when existing home prices rose 74%. The article also explained that market reaction to interest rates isn’t predictable or immediate. That certainly seems to be the case this time, as home prices keep rising despite a big jump in the average mortgage rate over the last three years.

Tech Talk: Those who look at things from a technical perspective could be checking the charts and checking them twice to figure out if Monday’s “key reversal” might mark a “double bottom” that could potentially provide support on any future downturns. Back in late October, the S&P 500 Index (SPX) hit an intraday low of 2603. On Monday, it fell below that to just under 2585 at around midday before barreling higher and posting a positive finish. That move, in which the SPX posted a new low and then finished higher, is the kind that tends to look bullish on the charts, and arguably sets up a new area of support between those two Q4 lows of 2585 and 2603. Historically, moves like Monday’s can sometimes light up technical buying and short-covering by helping convince some of the bears that a bottom might be in. Of course, nothing’s for sure. The market could again test those levels at any time, and next time if it falls below 2600 the bulls might get discouraged, perhaps sending the SPX back down toward a test of support near the early-2018 lows in a range between about 2530 and 2550. 

Dollar Roars Back Toward Highs: Remember when a little dollar weakness early Tuesday appeared to help gold and crude? Well, it quickly became a memory as the day continued. By the end of the day, the dollar index, which measures the greenback against a basket of other major currencies, had steamrolled to its highest level in a month at nearly 97.50. That’s not far below the 2018 high. Right now, the dollar seems like a pretty good barometer to potentially help investors gauge overall market sentiment. A stronger dollar can imply that the kind of “risk-off” trade we saw last week might be coming back, possibly weighing on stocks. When the dollar weakens, it often reflects hope of progress in trade talks between China and the U.S., which apparently was the case when it fell early Tuesday. The dollar has had a pretty strong year, partly due to trade fears that apparently have some investors looking for possible ports in the storm. 

Good Trading, 

JJ

@TDAJJKinahan 

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Economic calendar for week of Dec. 10. Source: Briefing.com
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Key Takeaways

  • Another rally attempt appears likely as China trade sentiment on the upswing

  • British politics take center stage as no-confidence vote looks possible

  • Volatility edges lower while crude and overseas markets all on the rise

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