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Stock Market Hangover or Another Banner Year?

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January 2, 2015

If early stock indicators hold up, U.S. equity markets look to kick off their first trading day of a new year solidly in the win column. This follows a rocky finish to a strong performance for 2014 by most standards. A few early headwinds appear to have limited impact for now but may be general reminders of the headaches that could hold on; that includes a nearly 2% drop in U.S.-priced February crude to near $52 a barrel and soggy trading in European stock markets.

Expect light trading as many participants started their weekend way back on Wednesday. For now, watch the 2077 line for near-term S&P 500 (SPX) resistance and keep an eye on the CBOE Volatility Index (VIX), which flirted with 20 in recent sessions and appears to be operating with an upward bias this week no matter the twists and turns of the SPX. Now, that could simply be the result of added short-term protection trades for the extra-long weekend. Or, does it pack deeper meaning? Let’s keep watch.

FIGURE 1:

The CBOE Volatility Index (VIX) grazed 20 and closed just above 19 in holiday trading. The strong move left VIX about 5 points above where it closed 2013. Source: TD Ameritrade’s thinkorswim® platform. Data source: CBOE. For illustrative purposes only. Past performance does not guarantee future results.

By the Numbers. Sizeable losses in a thinly traded New Year’s Eve session shaved a sliver from a strong yearly performance across the major indexes. As the confetti flew, the SPX wrapped 2014 with a gain of just over 11% and is up over 60% in a climb that has stretched over three years. Just for a little deeper comparison, SPX has averaged an annual gain of 9.7% over the past 20 years. That puts 2014’s performance above the average but also likely raises some uncertainty about a repeat. By most accounts, fundamentals remain strong for the U.S. economy although the economy, or markets for that matter, won’t have the same Federal Reserve crutch as 2015 unfolds. Can they go it alone? The Fed has signaled higher rates are in the works beginning this year, but is so far favoring a data-reactive, go-slow approach. The blue-chip Dow Jones Industrial Average (DJIA) logged a 7.5% annual advance. Interestingly, December was a monthly loss for the DJIA; its first monthly loss in three. The tech-concentrated Nasdaq Composite (COMP), also up for three straight years, put in a 13.4% gain in 2014. The Russell 2000, the proxy for small-cap stock performance, has lagged the broader market; it gained 3.5% in 2014.

Made in America. Today’s trio of data (for those around to care) gives us a glance at the guts of the U.S. economy. Factory activity will be covered in two reports, released just ahead of and at 10 a.m. Eastern. First, it’s the Markit purchasing managers’ index, then the Institute for Supply Management manufacturing index, both for December and both expected to show a sector that is expanding, if at a slightly slower pace than a month earlier. Construction-spending figures, also hitting at 10 a.m., cover November. Street economists expect that construction spending rose 0.3%, which would build on a 1.1% jump in October. But it’s important to see what projects are underway. The economy-driving single-family sector has disappointed compared to other economic recoveries. Over the 12 months that ended in October, private residential construction spending rose 1.9% to a rate of $353.8 billion. That lags behind total construction spending, which had climbed 3.3% from a year ago to $971 billion.

Europe Closer to Action? European Central Bank (ECB) head Mario Draghi has signaled the ECB could be closer to launching full-scale quantitative easing (QE). Draghi, who may or may not have full consensus on his panel, said in a German newspaper that "the risk that we do not fulfill our mandate of price stability is higher than six months ago.” He indicated the ECB is making technical preparations to "adjust the scope, pace and composition of measures at the start of 2015, should this be necessary to respond to a too-long period of low inflation.” Market short-hand says that’s a nod toward QE. What’s prompting this chatter? Euro-zone inflation registered at 0.3% in November, well below the ECB's 2% target.

Good trading,
JJ
@TDAJJKinahan

JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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