Stronger than a mountain of steel
Faster then hell on wheels
We've got, we've got all the power we need
Let's build a playground on this old battlefield
-- "All We Are" Joey Balin (Warlock), 1987
Reversal
It happened quickly. I think it was nothing more than a pencil. Whatever it was it rolled off of the desk, suspended in air it seemed for moments, though it was less than a second. That pencil hit the floor, bounced once, and stopped where it was.
Suddenly, "they" started buying the market. Why? It was time. Rising Treasury yields had been pressuring equity markets broadly all day, and "growthy" tech-type stocks "all year."
The Nasdaq Composite had lost its 200-day simple moving average (SMA), the S&P 500 its 50-day SMA. Suddenly, the Nasdaq Composite found itself 10% below its late November record high. Correction? It was decision time.
The buy orders trickled in, tentatively at first. It was touch and go for about 90 minutes. The sellers gave it one more shot around lunchtime. Then it was game on. The fast led the furious, the dazed led the confused. Daily losses melted as both indexes took back previously "surrendered" ground.
The Nasdaq Composite and its non-financial cousin, the Nasdaq 100, both closed in the green. In addition, the Composite did manage to take back the 200-day line, putting off, at least for now, what might very likely have been an avalanche of risk-manager enforced portfolio exposure reduction. The S&P 500, for that matter, even as the index rallied throughout the afternoon, did fail to retake its 50-day SMA, though it has not broken contact.
That game is still afoot, and its outcome will have broader market ramifications. Bring on today's contestants.
What Happened?
Last week, financial markets responded negatively to the idea that the Fed's FOMC could move on reducing its balance sheet (monetary base) sooner rather than later. Markets don't love measured interest-rate hikes, but they do get the need. The outright removal of potential liquidity from the economy earlier than expected scares the living heck out of everyone who understands.
On Monday, the forces of evil (algorithmic sellers) were led on two fronts, and then taken in stride. First, Goldman Sachs, in a note to clients, expressed their expectation for four rate hikes in 2022. Then, the good folks remembered that these guys don't know anymore than anyone else.
Then former New York Fed President (and Goldman Sachs alum) Bill Dudley appeared on Bloomberg TV after writing an op-ed for Bloomberg News. Dudley outlined the series of mistakes he sees this Fed as having made and stated that the Fed may have to hike rates four or five times this year. Then, the good people also remembered that this guy wasn't exactly considered a lightning bolt when he was at the Fed.
Marketplace
Monday is a difficult day to decipher. Trading volume was elevated, and by most measures, the day was a "down" day, but the reversal required a bit of energy, and as always late-day prices (which were the day's highest) occurred at greater volume than seen at the day's lows, which ran from mid-morning until the noon hour in New York.
Of all of our mid-major to major equity indexes, only the Dow Transports (-1.54%) closed a long way (greater than half of 1%) from where they went out on Friday as the rails, airlines and delivery service companies were all taken out to the woodshed. Losers beat winners by roughly five to three at the NYSE and by more than two to one at the Nasdaq. Advancing volume comprised 38.5% of the NYSE aggregate and 45.5% of the Nasdaq aggregate, while nine of the 11 S&P sector-select SPDR ETFs closed in the red.
While Health Care ( ( XLV) ) gained more than 1% and both Materials ( ( XLB) ) , and Industrials ( ( XLI) ) gave up more than 1%, it was Technology ( ( XLK) ) that stole the show. The XLK eked out a 0.02% increase after being down as much as 2.8% intra-day. Within the sector, the Dow Jones U.S. Software Index gained 0.51% on Monday, while the Philadelphia Semiconductor Index scratched together a gain of 0.24%. (How only +0.02% you ask? Hardware. Electrical components and renewable energy equipment were lower.)
For those keeping score at home, the VIX backed off from a midday high above 23 to where it is now, just above 19, as I bang out this morning note. The CBOE equity only put/call ratio came off of last week's levels, while the CBOE index only put/call ratio dropped to levels in line with all of its key moving averages.
As far as Treasuries go, the benchmark U.S. 10-Year Note pays just 1.75% this morning after that yield had spiked above 1.8% on Monday. Meanwhile, the 90-day T-Bill had paid almost 12 basis points late Monday, so there has been some mild flattening of the yield curve indicating that either the bond market thinks that the FOMC will slow inflation, potentially slow growth, or both. That said, it's one day, and not a trend.
The Fed
This morning, Fed Chair Jerome Powell will testify before the Senate Banking Committee in his confirmation hearing after being renominated by President Joe Biden to a second term in his current position. Beware my young friends, during the 09 hour on the East Coast, ahead of Powell's testimony, both Cleveland Fed President Loretta Mester, and Kansas City Fed President Esther George are set to speak elsewhere. Not to cast either of the two in any specific light, as I often agree with both given my preference for Austrian-style economics, but Mester and George are voting members of the FOMC this year and the two are thought of as perhaps the two most naturally hawkish members of that committee. That could light a late-morning fire in futures markets that will quiet once Powell speaks.
In Powell's prepared remarks ahead of his Q&A session with the senators, Powell will say, "The economy has rapidly gained strength despite the ongoing pandemic, giving rise to persistent supply and demand imbalances and bottlenecks, and thus to elevated inflation." Powell will add, "We know that high inflation exacts a toll... we will use our tools to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched." In plain speak, the mission now becomes controlling public expectations for inflation going forward. Mind over matter? More like Mind first. Matter only if Mind fails.
In other news, Fed Vice Chair Richard Clarida, whose term was set to expire at the end of the month, resigned to the president effective this Friday. This comes in the wake of revelations that Clarida had been more active in financial markets in 2020 than previously divulged. Clarida's resignation is not unexpected.
Macro Watch
Key to watch, perhaps even more than big bank earnings on Friday, will be December CPI due Wednesday and December PPI on Thursday. Following these two data points will be December numbers for both Retail Sales and Industrial Production. Expectations are currently for a headline CPI that prints with a 7 handle and a core CPI that rises above 5% annually. Should this happen in conjunction with a headline PPI print that approaches 10% growth year over year, obviously the Fed will feel pressured to swing its terrible swift sword at inflation with some gusto.
The danger with that idea presents on Friday as both Retail Sales and Industrial Production are expected to contract sequentially despite the impacts of the holiday season. The last thing I think allocation decision makers need right now is to perceive the idea of a central bank heatedly chasing down inflation in a weakening economy.
After Monday's November print for Wholesale Inventories, the Atlanta Fed's GDPNow model now sports a 6.8% snapshot for Q4. After that barrage of December data to be released this Friday (that also includes import and export prices), it is probably a fairly safe bet that it will not.
Food for thought.
Okay, So Talk
It appears that talks between U.S. Deputy Secretary of State Wendy Sherman and Soviet, I mean Russian Deputy Foreign Minister Sergei Ryabkov accomplished little on Monday other than agreeing to keep talking. That's better than an angry result as 100K Russian troops mass on the Ukrainian border. Oh, and North Korea supposedly launched another ballistic missile (at perhaps 10 times the speed of sound) into the sea.
That said, the hypersonic missile siblings -- Lockheed Martin ( LMT) and Northrop Grumman ( NOC) -- have been hot.
Lockheed has filled the previously unfilled gap on the left side of the double-bottom reversal pattern. The stock continues to break out from a $348 pivot, but has not yet held above a 61.8% Fibonacci retracement of the October into November selloff.
We are currently working with a $417 target.
Northrop has also filled the gaps of last October, and went on to build a triple bottom that I see more as a cup pattern with no handle. Until we see the development of a handle, which I would prefer given that these shares are technically overbought, the pivot remains the peak of the left side of the cup, or $408. Should this chart add a handle to the cup, the pivot will shift from the left side peak to the right side peak, which is currently getting pretty darned close to the same thing.
Our price target for NOC is still under construction, but for right now, something in the $480s (or even higher) is probable.
Economics (All Times Eastern)
06:00 - NFIB Small Biz Optimism Index (Dec): Expecting 98.3, Last 98.4.
08:55 - Redbook (Weekly): Last 18.8% y/y.
16:30 - API Oil Inventories (Weekly): Last -6.432M.
The Fed (All Times Eastern)
09:10 - Speaker: Cleveland Fed Pres. Loretta Mester.
09:30 - Speaker: Kansas City Fed Pres. Esther George.
10:00 - Speaker: Federal Reserve Chair Jerome Powell.
