Equity markets opened strong on Wednesday, and even showed resilience in the face of mid-morning sell programs. Ultimately, however, the weight proved too heavy, the dam cracked, and U.S. equities closed weakly.
The Nasdaq Composite, after having been up a full percentage point, closed down 1.15% for the day. Not only that, the Nasdaq Composite closed below its 200-day simple moving average (SMA) for a second consecutive day, while failing to make contact with that line for a first day. Is that important? It could be.
Should the Nasdaq Composite find some support and stay close before rallying on some or any catalyst, all would be quickly forgotten. The longer this index remains below the 200-day line, the easier it becomes for risk managers to compel portfolio managers to reduce exposure. The index closed on Wednesday 11.5% below it's November high and has gone two months now without setting a new record.
The S&P 500 gave up just less than a full percentage point for the session, and closed at the bottom of the day's range for a second consecutive session. In addition, the broadest of large-cap indexes closed below it's 50-day SMA for a third straight day, and without making contact with that line. Of course, the S&P 500, is less tech heavy than are the key large-cap Nasdaq indexes, and did manage to make a new high in early January as some managers rotated equity allocations out of growth types and into value. The S&P 500 now stands 5.9% below that Jan. 4 intraday peak.
Beyond large-caps, the Russell 2000 took a serious (-1.6%) beating, closing down for a ninth day in 12, dragging its 50-day SMA below it's 200-day SMA, creating what is known as a "Death Cross." This is often considered to be a bearish signal, and can create an algorithmic reaction for the large-cap indexes. Fortunately (no promises), going back, it appears that while this phenomenon has often occurred just prior to a sharp decline for this index, that decline has often produced a bottom, resulting in higher prices within weeks to months. Again, no promises. The monetary, and fiscal environment, not to mention the state of public health conditions are indeed very different this time. The Russell 2000 hit its apex in early November and closed Wednesday 16.1% short of that level.
Still Not Nervous
I hear other traders talk of "needing" a washout or a flush in order to find a bottom. I just do not see signs of any imminent capitulation. Not that markets won't be able to find a short-term bottom here or there. Beijing once again cut interest rates overnight, after seemingly just doing so a few weeks ago. This has put a bid under the Hang Seng as well as other Asian markets. European stocks opened well, then sold off rather sharply prior to finding a bid close to the "unchanged" mark. U.S. equity index futures appear to be positive. Then again, I am writing this several hours ahead of the opening bell in New York. A lot can happen between now and then.
Back to interpreting this almost confounding lack of fear. I understand that algorithms don't have emotions or the instinct to act on their "gut feelings" the way humans used to, but there have been many instances in the past where massed algorithmic execution has only increased volatility, and forced tremendous directional overshoot. Maybe that's the case right now.
Are the indexes overreacting at these levels? Are the markets pricing in some level of probability of martial activity in Eastern Europe?
The VIX is elevated, relative to its 50-day and 200-day SMAs, but going back over the past two years, these levels hardly raise eyebrows.
Same can be said for the CBOE Options Total Put/Call Ratio. Slightly elevated relative to its moving averages, actually lower this week, than last.
In fact, just look at where the Index only Put/Call Ratio went out on Wednesday. Safe to say that the people are not exactly terrified.
Glimmers of Hope?
While breadth was again quite awful on Wednesday, with losers beating winners at the NYSE by roughly 9-4, and at the Nasdaq market site by more than 2-1, and while advancing volume comprised just 30.7% of the aggregate for NYSE-listed names and 31.7% for Nasdaq-listed names, said volume was in fact... light on Wednesday.
Composite trading volume dropped 5.8% for NYSE-listed names on Wednesday from Tuesday. The one-day drop in activity was even more notable (-8.7%) for Nasdaq-listed stocks. Names subordinate to both the S&P 500 and Nasdaq Composite failed to reach their respective 50-day trading volume SMAs on Wednesday as well.
None of that discounts the fact that nine of the 11 S&P sector-select SPDR ETFs ran red for the session, with two "defensive" type sectors in the green, and two "cyclical" types at the bottom. If you bought them, you still bought them and if you sold them, you still sold them. This does, however, indicate to me, that at least on Wednesday, professional capital was indeed far less aggressive than it had been on Tuesday.
Why is that? Capital still flowed elsewhere. Bond traders did buy up the middle to the long end of the spectrum of Treasury securities. Yields dropped from the U.S. 2-Year on out to the 30-Year, while traders sold the short end. There was no real love for anything from the U.S. 1-Year down to 30-Day.
Gold and silver were also strong. Safe haven? Perhaps. Perhaps just a sensible broadening of asset exposure in a tough environment. As for the ETFs, the SPDR Gold Shares ( GLD
) gained 1.6% on Wednesday, while the iShares Silver Trust ( SLV
) soared 3.1%. Both Bitcoin and Ethereum found support on Wednesday as well and have built on that support through the wee hours.
Has anyone else wondered if maybe the market has set itself up for a "dovish" surprise from the Fed? I know, I get it. Inflation is way too hot. Understand this, though: In a semi-normal to normal economic environment, central banks can and will impact inflation (and growth) through monetary policy. One thing the Fed, or any central bank cannot do, is correct scarcity through the implementation of any kind of policy.
Hear me out. I am not dovish at this time, at least not yet. Will higher interest rates move goods into seaports? Slow Covid? Ease travel? Find able bodied employees for employers in need? Higher rates will certainly reduce existing potential for wage growth. Of that I am certain.
While changing the trajectory of monetary policy certainly impacts directional economics, that is in an economy where there is more give and take than there is in this one. Helicopters put you down on your own somewhere strange, you don't waste water. Not one drop. Someone could offer you a million dollars, you're not selling your water. Same concept. The forces at hand may be less elastic than many economists currently assume.
What if this sudden deceleration in economic activity experienced late in the fourth quarter and into the first quarter persists? Those helicopters are not coming to some kind of mass fiscal rescue as they had since the start of the pandemic. Sure, we have an infrastructure bill that has been signed into law. The household support, however, is over. That amounts to one big rollback for consumer demand. Maybe less demand for goods and services ultimately amounts to less demand for labor. Maybe the Fed wants to take this more slowly than markets are pricing in.
My suggestion? (This is for you, Jay) Open the door to a less hawkish future on Jan. 26. Still move forward with a 25 basis-point increase in the target for the Fed Fund Rate in March if practical, while keeping all options open. Work on the balance sheet more than on short-term rates for at least Q2 and Q3 2022. Very good chance inflation produced through scarcity only eases once scarcity itself eases. Use the balance sheet to maintain a healthy looking yield curve should the economy continue to slow.
Does that mean the outright sale of securities at the long end of the curve? Or in the belly? It means, do whatever it takes, even if maintaining the slope of the curve requires the purchase of T-Bills.
Operation Twist-amundo? Food for thought. We do not have to panic. So, cool it.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 209K, Last 230K.
08:30 - Continuing Claims (Weekly): Last 1.559M.
08:30 - Philadelphia Fed Manufacturing Index (Jan): Expecting 19.6, Last 15.4.
10:00 - Existing Home Sales (Dec): Expecting 6.42M, Last 6.46M SAAR.
10:30 - Natural Gas Inventories (Weekly): Last -179B cf.
11:00 - Oil Inventories (Weekly): Last -4.553M.
11:00 - Gasoline Stocks (Weekly): Last +7.961M.
The Fed (All Times Eastern)
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open
: ( AAL
) (-1.51), ( KEY
) (0.56), ( TRV
) (3.87), ( UNP
After the Close
: ( CSX
) (0.41), ( NFLX
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