Many of us have been there. Hopefully for most of us, not for a very long time. It's that moment when a young lad realizes that he may have just picked a fight with the wrong guy. It usually doesn't take very long for the brain to ascertain that an opponent is not only willing to go there, but seems quite at ease in doing so. There is nothing worse than fighting a guy that knows how to fight. That's the moment. The moment when you realize that even if you figure out how to get by, you're probably going to get hurt.
For a lot of traders, that moment passed on Tuesday, when the S&P 500 failed to hold the 200-day simple moving average. How fast has this game become? Well, in this age of algorithmic trading that occurs in micro-seconds because milliseconds are far too slow, a flood of sell programs were unleashed in search of the next bid, while simultaneously cancelling their own bid sides. This created an unbalanced marketplace. In the age of the two-sided auction, this might have happened, but not likely in free-fall fashion.
Thursday morning, not only are European and Asian equity markets trading in the hole, but so are domestic equity index futures. As some traders wake up, they will be forced to decide if this was the discount they were looking for. My guess is that as a nearly imminent "death cross" stalks the S&P 500, few will be so bold, as that algo crowd may spring another mindless (or maybe not so mindless) volley at the marketplace.
What's Wrong Now?
The question is rather, what is not wrong? Even if one avoids looking at the technical setup, there are plenty of potential negatives piled on top of actual negatives being priced in this morning. Choose your poison.
1) The arrest of Huawei Chief Financial Officer Wanzhou Meng by Canadian authorities at U.S. request would present an obvious point of contention between the U.S. and China, just as Beijing seemed to be publicly reiterating an intent to follow through on promises made over the weekend in Argentina.
2) As Russian President Vladimir Putin threatens an arms race, for the first time in over thirty years the U.S. sails a destroyer through waters in the Sea of Japan claimed by Russia, but perceived as international by everyone else.
3) The Fed's Beige Book released on Wednesday while U.S. equity markets were closed, at least on the surface, portrayed a still strong economy, especially in regards to labor. However, it cannot be ignored that four of the twelve districts reported that economic growth had slowed in their region. One of these conditions does not last well without the other, gang.
4) As OPEC heads into the cartel's meeting with non-OPEC producers, it appears that Russia and Saudi Arabia remain a bit further away from agreeing to anything meaningful in the way of a production cut than previously thought.
5) Prospects for a clean Brexit deal seem to be deteriorating further. Is the UK in turmoil? Is the perception that the UK is in turmoil enough to scare traders into safe-haven type investing?
Did I Get Everything?
Of course not. Issues resultant of all of these uncertainties would be dollar strength, as well as strength in Treasuries. The yield curve? Yes, that remains the most significant worry, in my opinion, as the 2/10 curve has never inverted in the purely algorithmic age. That spread has broadened to more than 13 bps this morning. Such a relief. No telling what beasts will be unleashed when Pandora's Box is finally opened. Think I'm kidding? Don't open that box.
Remember this. The S&P 500 November low was higher than the October low. The October low was higher than the May low. The May low was higher than the April low, and the April low was higher than the February low. Conversely, the index has made lower highs ever since September. It looks sloppy on the chart, but you can see how close the 50-day SMA is to the 200-day SMA. Take a look.
The market appears to be half way into what is developing as a potentially explosive formation, as if recent market behavior were not explosive enough. If no upside catalyst presents, sentiment will continue to pull the index toward a retest of every one of those sequential lows.
Are these facts? No. They are thoughts. You will still see short, violent rallies -- as the marketplace experienced on Monday. There also remains the prospect of a seasonal rally over the three-week period covering the last two weeks of December and the first week of January. Of course the FOMC will have great sway over whether or not this develops. They can't be this blind, can they? Use that to your advantage. Is cash king? Well, it never loses principal in nominal terms.
Should You Be Afraid?
No. Never Fear. Fear creates poor decision making. Fear is not only for the enemy, fear is the enemy itself. We all woke up on this side of the dirt this morning. We are all going to take a shower, get dressed and tie our shoes. We all love somebody that loves us back. Got a source of heat? Reliable clean water? Well, then.. it ain't so bad, now is it?
Oh, that tough kid? He's outside. It's time.
One More Thought
Broadcom (AVGO) reports tonight. The stock gave up 4% on Tuesday, and is nearly 3% lower this morning. The industry is looking for EPS of $5.58 on revenue of $5.39 billion. Whispers are for a serious EPS beat here. It appears to this old dog that the firm has been executing extremely well. That will not matter up front, as this firm is highly exposed to China -- even more so than many other highly exposed semiconductor names.
That makes what CEO Hock Tan says tonight far more important than any numbers on recent past performance. Tan will have to offer guidance on the current trade environment as well as on the integration of the recently acquired Computer Associates. My thought (not groundbreaking) is that when positive news does finally break on trade, this is a name that an investor would already want in inventory. That said, a trader (such as myself) might be likely to take down an entry level position on a deep enough discount.
What is a deep enough discount in this environment? I think we'll let the stocks open, and then price out the put side. My guess is that the January 200s and 210s may pay more of a premium than they should. This is dangerous. Do not think that I am in this. I am merely saying that this is on my shopping list.
Economics (All Times Eastern)
08:15 - ADP Employment Report (Nov): Expecting 189K, Last 227K.
08:30 - Initial Jobless Claims (Weekly): Expecting 225K, Last 234K.
08:30 - Unit Labor Costs (Q3-rev): Flashed 1.2% q/q.
08:30 - Non-Farm Productivity (Q3-rev): Flashed 2.2% q/q.
08:30 - Balance of Trade (Oct): Expecting $-55.1B, Last $-54B.
09:45 - Markit Services PMI (Nov-F): Flashed 54.4.
10:00 - Factory Orders (Oct): Expecting -2.0% m/m, Last +0.7% m/m.
10:00 - ISM Non-Manufacturing Index (Nov): Expecting 59.1, Last 60.3.
10:30 - Natural Gas Inventories (Weekly): Last -59B cf.
11:00 - Oil Inventories (Weekly): Last +3.577M.
11:00 - Gasoline Stocks (Weekly): Last -764K.
12:15 - Fed Speaker: Atlanta Fed Pres. Raphael Bostic.
18:30 - Fed Speaker: New York Fed Pres. John Wiliams.
18:45 - Fed Speaker: Federal Reserve Chair Jerome Powell.