The rough open to December appears ready to take a pause Wednesday as the trade headlines look a bit more positive. Risk-off assets, which shot up on Tuesday, could be interesting to watch for their reaction if stocks move higher.
Stocks appear to be rebounding after Tuesday’s sharp losses
Latest trade headlines sound more positive, supporting stocks
“Risk-off” trading was evident Tuesday, with bonds, gold, VIX all up
(Wednesday Market Open) You’ve heard of turnaround Tuesday. Well, it just appeared to arrive one day late this week.
Stocks look like they could be walking the rebound path early Wednesday after a three-day losing streak highlighted by Tuesday morning’s stomach-churning plunge of more than 400 points for the Dow Jones Industrial Average ($DJI). The recovery in pre-market trading today follows an upturn in European indices after a news report that said—wait for it—trade talks might be making progress after all. Specifically, the U.S. and China are moving closer to agreeing on the amount of tariffs that would be rolled back in a phase one trade deal, Bloomberg reported.
For investors, this back-and-forth action around trade headlines once again shows how important it is not to get caught up in all the noise and stick with your long-term plan. The market has the trade channel on its favorites list, and that’s causing a lot of daily and hourly action that might look relatively benign six months from now but can feel dramatic when it happens (like yesterday). At times like these, when there’s little distraction from earnings, people tend to tune in to the only station that’s playing, and that’s partly why there’s so much volatility around every new development between the U.S. and China.
While it’s true that earnings tend to be scattered at this time of year, software company Salesforce (CRM) reported late Tuesday and posted better than expected earnings and sales. The stock fell a bit in pre-market trading, however, as analysts called the company’s guidance a mixed bag. It was good to see subscription and support revenue, a key metric, come in a little above third-party consensus views.
Campbell Soup (CPB) topped analysts earnings estimates but missed on revenue and shares fell in pre-market trading. In its press release, the company noted that it grew soup share for the first time in 10 quarters, which it called “one of the early signs of progress” in a three-year “journey” to revitalize the business.
Tomorrow morning it’s back to retailers, with Kroger (KR) and Dollar General (DG) on tap.
In other news, a report early Wednesday showed slow private payrolls growth in November. This could potentially take some of the shine away from the more hopeful trade news, but the real data to watch is Friday’s official government jobs number (see more below).
There’s no getting around it: The market had a rough start this month thanks mainly to trade-related drama. What’s good to see, though, is how stocks clawed back yesterday from their steep early losses to finish moderately lower instead of dramatically lower.
One school of thought suggests that when there’s a two-day sell-off, what happens toward the end of day two and the start of day three can help determine whether investors face a longer string of losses or if the pressure is just a brief interlude. The way stocks took a stand late Tuesday might raise chances that this isn’t the start of something prolonged, though today’s open could also play a part.
Support down below might rest near the 50-day moving average of 3033 for the S&P 500 (SPX), and just below 3000 (which roughly corresponds with the 100-day moving average), analysts noted. One thing to consider—if this trade impasse continues and Dec. 15 approaches without a resolution to the new tariffs scheduled to take effect that day—is the chance for a more dramatic drop and maybe a test of the 200-day moving average down near 2930.
Even a drop to 2930 (which can’t be ruled out but isn’t necessarily in the cards), would still mean 17% gains year-to-date for the SPX, which would represent a very good year. Keep in mind that the trade situation remains very fluid, too. While the week began with negative news, any positive headlines have the chance to take stocks right back the other way (kind of like we’re seeing this morning). Things could get interesting as we approach that Dec. 15 tariff deadline. In the past, the U.S. has often pulled back tariff threats as the date approaches. Failure to do that this time might hint that the situation has gotten worse.
There’s not a heck of a lot on today’s economic or earnings calendar, but sit tight because the end of the week brings the November payrolls report (see more below). Today does include the weekly U.S. crude stockpiles data, and tomorrow morning gives investors a look at weekly jobless claims. Anything above 220,000 might raise some eyebrows after initial claims fell to 213,000 last time out.
With the weak manufacturing numbers over the last few months, there might be more attention paid to those weekly claims from here on. These data could represent one canary in the coal mine if the soft manufacturing climate starts making employers start to shed workers.
If stocks keep falling, don’t necessarily look for the Fed to step to the rescue when it meets next week. At least that’s what the futures market seems to be saying, with CME Group futures showing zero odds of a rate cut. However, some analysts argue that if stocks go into a prolonged struggle related to bad trade news, just the idea that the Fed might be waiting in the shadows could potentially limit selling pressure.
In the meantime, most of the “risk-off” metrics lit up Tuesday after being kind of quiet during Friday and Monday’s lower stock market sessions. By the end of the day Tuesday, bonds had executed a pretty major move higher, sending the 10-year yield all the way back toward recent lows just above 1.7%. Other caution signs included a rally in gold, the Japanese yen, and the Cboe Volatility Index (VIX). The VIX climbed to nearly 18 early Tuesday but then took a long ride lower the rest of the day to finish below 16. This could be a sign that investors don’t think the current turbulence will last.
The only sectors to post gains Tuesday were Real Estate and Utilities, which makes sense on a day when bond yields tanked. Falling yields can sometimes make dividend-paying stocks seem more attractive. Not too long ago, the 10-year yield was pretty close to matching the S&P 500 dividend yield. Now it’s well below that, perhaps making Treasuries less enticing for some investors. Of course, if the trade situation really starts to look dire, it might be hard to keep people from embracing more defensive investments, even at low rates.
With worries mounting about delays to a trade deal, semiconductors got hit harder than most of the Technology sector, falling 1.5%. Quite often over the last year, some investors have seen semis as a barometer for how trade negotiations are doing. The other big barometer some people have adopted for trade is Apple (AAPL), and that stock fell nearly 1.8% on Tuesday.
Another weak sector Tuesday was cars, trucks and other things that go. The Transports fell more than 2%, with airlines particularly hard hit (and many of them were looking weak even before now). That’s kind of ironic considering many analysts had forecast a record-setting Thanksgiving travel season. We’ll have to see if any numbers start coming in to confirm whether that happened, because confirmation might help some airline names
The Materials sector—which has a lot of exposure to the trade war and has been trailing the SPX all year—didn’t do well, either. However, some gold miners, including Newmont Goldcorp (NEM) looked strong in part because of the rally in gold. Copper miners like Freeport McMoRan (FCX), however, had a challenging time thanks to weakness in that commodity, Briefing.com noted.
Small-caps fell Tuesday but outpaced the broader market possibly because investors see smaller firms having potentially less exposure to trade issues.
If you’re long the market, it’s never fun to lose money on a day like Tuesday. Still, it’s kind of reassuring to see things behaving so predictably. The semis and AAPL lost ground on trade worries while gold and bonds rallied. It’s just what you might expect. The question is whether it lasts much longer. Those technical support points might have something to say about that.
CHART OF THE DAY: TREND STILL ON? In the short-term, the downside breakout on the S&P 500 Index (SPX - candlestick) below the lower support of the upward sloping channel (yellow lines) may look bleak. But longer-term, SPX still looks like it may be trending up, as suggested by the 50-day moving average (blue line). Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
A Tug of War in Equities: A significant downward move in the S&P 500 Index (SPX) for a few days doesn’t necessarily spell trend reversal. The SPX, which was trending up in a narrow channel from mid-October and hitting new highs during November, recently showed a change of heart. Since then, the markets went into selloff mode, sending the SPX breaking below the support level of that narrow channel (see chart above). This intensified the selling even more. Uncertainty about the trade deal between U.S. and China and the ISM numbers that suggested contraction in the manufacturing sector may have played a role. Is this a short-term reaction?
The lower level of the channel could be worth watching since it might act as a resistance level if SPX heads back up toward that positive sloping channel. Or the SPX could move back into that upward-sloping channel and continue moving up. But that’s looking at a short-term move. If we shift gears and look at the big picture, the 50-day simple moving average indicates the uptrend may still be in play. Will the 50-day SMA act as a support level or will SPX move up toward the channel?
‘Tis the Season: So-called “seasonal” factors get lots of ink in the media every year, but tend to be over-emphasized. Just because something worked in the past doesn’t mean it will again in the future. That said, one thing to potentially track once the new calendar year begins could be the performance of some of this year’s losing names. This time of year is when many investors start combing through “losers” in their portfolios looking for stocks they can sell to hopefully ease their annual tax burden by claiming losses. This tends to raise pressure on those stocks in December, but a funny thing sometimes happens in January: Those same stocks often rise, Barrron’s noted last week.
Why? Because the selling pressure comes off in January after the deadline for claiming a 2019 loss expires on Dec. 31. Barron’s cites the example of General Electric (GE), which saw shares drop nearly 35% between November and December 2018 and then climb 34% in January. Does this mean investors should take a chance on some “losers” next month? Not necessarily. It’s never a good idea to attempt to time the market or depart from your established investment plan to take advantage of a trend that might not go your way this time around. That said, it could be interesting to watch how some of the beaten-down energy and department store stocks perform in January, if this theory comes into play again.
Jobs Wildcard: As we noted yesterday, analysts are converging around a number near 180,000 for November jobs growth ahead of Friday’s report. That’s solidly higher than the 128,000 seen in October. The wildcard this time is the General Motors (GM) workers returning from their fall strike. The strike ended in late October and 48,000 striking workers returned to work. Some of this could be picked up by the November report, meaning a big jobs growth number for the month might get seen as a blip related to that development. The glass-half-full argument would be that October’s 128,000 figure was artificially depressed by those workers being on strike, which sliced close to 50,000 workers from job rolls that month. One other factor that’s less bullish, however, is private firm iCIMS reporting Tuesday that it saw hiring and job openings down 0.1% and 0.6%, respectively, on a seasonally-adjusted basis, in November. “Lower demand for workers was evident across industries, but particularly in retail trade,” said iCIMS, a recruitment software provider for employers.
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