The army of professionals paid to fit facts to figures are out in force this morning ‘’explaining’’ the now 3-4% one-day falls in all the major US stocks indices on a combination of the recent back-up in US Treasury yields and deepening trade-related worries. Certainly these are both eminently plausible justifications, and indeed I have been at the vanguard of commentators viewing the recent Bloomberg expose of the alleged Chinese compromising of Supermicro’s computers as of wide ranging significance both in terms of understanding the likely breadth and severity of the Sino-US trade disputes and for the current travails of the IT sector. The latter is leading the charge lower in the major US indices (e.g. the S&P 500 is now some 5% off its early month highs but the It sub-sector more than double this). Yet for all that, the smaller-cap Russell 2000, representing companies that should not be particularly sensitive to either US bond yields or trade concerns, started falling well ahead of the US household name indices, and month-to-date is now off almost 10%.
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For anyone following my Platinum Service it lost 280 points yesterday and is now ahead by 141 points for October, having made 1276 points in September, 599 points in August, 1074 points in July, 994 points in June, 1927 points in May, 1657 points in April, 1760 points in March and 2256 points in February. Since I started this New Platinum Service in June 2015 it has averaged a monthly gain of over 1600 points
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As such, and in the midst of still undeniably stellar US growth, a simple rush to book some profits may be the better explanation of this month’s sell-off and in which respect, it should be no surprise that the sectors that has led the charge higher this year in recent years, i.e. IT in general and FAANG stocks in particular, are showing some of the heaviest falls in the major indices.
Whatever is the correct explanation, the fact is that that the S&P-linked VIX (fear gauge) is back above 22 for the first time since mid-April and a such we are seeing a little bit of a reconnect between the divergent paths of Developed versus Emerging risk markets that has characterised markets for much of this year.
The biggest stock market sell-off since February rolled through to Asia overnight with most Indices losing over 4% while the S&P Futures Market is down another 1% this morning. At 1.00 pm yesterday the S&P was trading at 2882 with the market now trading at 2759 as I go to press.
Bonds
If higher bonds yields are to any extent responsible for the equity sell-off, as theory would suggest is justified as the ‘’risk-free’’ rate used to discount future earnings streams ratchets higher, then the converse is not true today insofar as the equity sell-off had not until the last hour at least – been accompanied by a fall back in bond yields. 10 year US Treasuries were sitting just above 3.20% (3.17% now) which is where they closed in New York on Tuesday. Then more Fed policy sensitive 2-year note is though now 3.7bps lower at 2.85%). Earlier yesterday, we saw Italian 10 year bond yields holding the recent break above 3.5% with the Italian government as yet showing no signs of backing down on its 2.4% budget deficit ambitions for the coming year.
In general, the bond market is not as yet giving a suggestion that the equity correction is of sufficient magnitude that it could cause the Fed to take a break from its current ‘’quarter per quarter’’ gradual tightening path. This looks wholly appropriate and as one ‘’think tank’’ consultancy whom I met in London yesterday said, if there is a ‘’Powell put’’ whereby the Fed will always step up to provide protection in the face of a falling stock market, the strike price is probably a long way below that on the ‘’Yellen put’’. That said, President Trump may well soon be out again railing against the Fed and blaming them for weaker stocks, having resumed his criticism of the pace of rate hikes on Tuesday afternoon.
Currencies
While not exactly a side show, it has not been a particularly dramatic past 24 hours for currencies with FX a lot more sedate than stocks. With the (inexplicable) exception of the NOK given the drop in oil the Japanese Yen is the best performing G10 currency, up around 0.5%, while the risk and commodity price sensitive AUD, NZD and CAD occupy the bottom there slots on the G10 scoreboard (with CAD, -0.75%, faring worse than either AUD (-0.4% to 0.7074) and NZD (-0.23% to 0.6458). Sterling continues to be sucked higher amid ongoing optimism driven by comment from both EU officials and source stories in the UK press that a Brexit Withdrawal agreement is close to being agreed (80-90% if you believe the reports).
Commodities
With the exception of gold (+$4) commodities are in a sea of red, led by falls of over $2 in both WTI and Brent crudes. The latter is somewhat ironic insofar as Hurricane Michael, the strongest to make landfall in the United States since 2004 (i.e. pre-Katrina) has seen precautionary shut-down in a large section of Gulf of Mexico production even though not in the direct line of Michael’s fire. This would seem to attest to just how much of a speculative element there has been to the recent run-up in oil, albeit seemingly with good justification in front of the re-imposition of US sanctions on Iranian oil exports.
Exchange traded industrial metals are all lower, led by a 0.8% fall for copper, but note that neither iron ore or coking coal have succumbed to commodity prices pressures elsewhere (iron ore is flat, coking coal slightly higher)
This morning on the Economic Front we have UK Bank of England Credit Conditions and Bank Liabilities Survey at 9.30 am. Next and lastly we have the US CPI and Weekly Jobless Claims at 1.30 pm. The forecast for CPI is a rise of 0.2% with risks of an upside surprise.
December S&P 500
The strategy of buying the dip has worked wonderfully for most of 2018 but unfortunately this theme came to a dramatic end yesterday with the S&P falling over 130 Handles from where I marked prices 24 hours ago. This was one of the most dramatic sell-off’s in recent years. After the S&P hit my average buy level at 2867 I was quickly stopped out of this position at 2856. Subsequently the S&P dropped to my second buy level at 2842 before thankfully rallying to my revised 2850 T/P level and I am now flat. I cannot believe that the S&P traded over 100 Handles lower with the acceleration in the last 10 minutes of trading scary. As I was working in London yesterday I missed a lot of the price action as I was not home until 8.00 pm. Three things that I look for to witness a rebound in US Stocks are when we are trading well outside the bottom of the Daily Bollinger Band, at the bottom of the Williams Index and for the McClellan Oscillator to have a reading greater than -250/-300. The first two have conformed while the MO closed at -245 last night. Given today’s Futures sell-off the MO is probably close to -300 now. The 200 Day Moving Average comes in at 2768 this morning which is above current prices but I want to see what the US traders do when the market opens as we have left a large 30 Handle Gap from last night’s Chicago close. I would expect a lot of this ‘’Open Gap’’ to be filled later. When volatility spikes above 22 we have to trade in smaller size with wider stops. Today I will be a buyer of the S&P from 2740/2755 with a 2730 stop. If I am taken ,long and subsequently stopped out of this position I will be a more aggressive buyer from 2700/2718 with a 2690 stop. I have to respect yesterday’s price action and even though the market is severely oversold I will be a small seller on any rally higher to 2810/2825 with a 2837 stop.
EUR/USD
I am still flat the Euro and today I will now raise my buy level to 1.1430/1.1470 with a 1.1390 stop.
December Dollar Index
I am still flat the Dollar and I am not going to chase this market lower especially as we have the key CPI data from the US at 1.30 pm. Thus my sell level of 95.70/96.10 will remain unchanged with the same 96.45 stop.
December DAX
As I was already long the S&P and FTSE I waited to buy the DAX at 11790 which was the bottom of yesterday’s buy range before getting stopped out of this position at 11735 and I am now flat. I am going to stay flat the DAX today as I want to see how the US Markets react to the McClellan Oscillator’s oversold condition when they open this afternoon.
December FTSE
My FTSE plan did not work well with the market trading lower to my 7115 buy level before stopping me out of this position at 7070 and I am now flat. The FTSE is severely oversold and due a correction. It is probably the safest in points terms to trade given it is on a 7000 Index in comparison to the Dow and S&P. The FTSE has strong support off its overnight low at 6980 and today I will again look to buy the market on any dip lower to 6960/7000 with a 6925 stop.
Dow Rolling Contract
What a day with Dow falling over 1400 points in the last 24 hours as one long position after another got slammed including me. Overnight the Dow tested its 200 Day Moving Average which comes in at 25138 before rallying 250 points off this key support so far. For the bulls to have any hope with a recovery from yesterday’s aggressive this MA must hold. Yesterday as I was limit long the S&P I waited to buy the Dow which I did at 26060 before getting stopped out of this position at 25990. Subsequently and unfortunately I re-bought the Dow in small size at 25700 before getting stopped again at 25550 shortly after the New York close and I am now flat. This is one of the largest one day sell-offs in points terms in the Dow’s history. Given the -245 print for the McClellan Oscillator (remember this signal is only triggered a few times each year and can lead to a dramatic rally) I will again look to buy the Dow on any further dip lower to 25000/25250 with a 24800 stop. The Cash Dow closed at 25600 last night so again we have a large ‘’Open Gap’’ which I believe will get mostly if not all filled this afternoon.
December NASDAQ
Thankfully we had no buy levels in the NASDAQ yesterday which had its largest one day move lower in over seven years. The NASDAQ has now fallen over 800 points in the last few weeks with the 200 Day Moving Average coming in at 7064 this morning. If the market can regain this key area coupled with the S&P holding its 200 Day MA then we may see a decent relief rally this morning. Given the extent of the sell-off in the NASDAQ I have bought the market in small size at 7000 with a 6940 stop and a 7090 T/P level. If any of the above levels are filled I will again look to buy the market on any dip lower to 6840/6905 with a 6790 stop. If my second buy level is filled I will have a T/P level at 7005.
December BUND
My Bund plan worked well with the market trading lower to my 157.45 buy level before rallying to my 157.70 T/P level and I am now flat. This morning the Bund has traded to a high of 158.70 on the weaker equity markets before selling off small in the last 20 minutes. Today I will again look to buy the market from 157.30/157.70 with a 156.90 stop.
Gold Rolling Contract
I am surprised by the weakness in Gold given the sell-off in risk markets. Today I will leave my buy level unchanged from 1171/1180 with a 1163 stop.
Silver Rolling Contract
Silver traded lower to my 14.30 buy level. I am still long and I will add to this position on any further move lower to 13.90 with the same 13.55 stop. Meanwhile I will leave my T/P level unchanged at 14.45 and if any of the above levels are hit I will be back with a new update for my Platinum Members.
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