Mnuchin Makes a Date with He, Futures Rally

So stocks finished the day higher – the S&P ended up 4 pts, the Dow added 34, the Nasdaq tacked on 51 while the Russell gave up 4 pts.    Yesterday’s headline asked “Are US Stocks Poised to Rally?” …Now I asked this question after an awful week – a week that saw the mkt get clobbered……and so the question was more rhetorical really……. in the end – the mkt did rally but what happened in between is really where the story is……

While stocks opened higher initially – sending the S&P up about 5 pts and the Dow up almost 75 pts….the tone once again did an about face and anything positive was replaced with anything negative……continuing to create a tough mkt and a tough trading environment.  In yesterday’s note I made the point that global mkts were all negative as our day was about to begin………..news out of Europe that the UK would postpone a BREXIT vote did not help, and the continued noise about the Chinese tech executive Meng Wanzhou’s  Canadian arrest remained on the front burner  and was causing those mkts to pull back…..

US futures had also gotten beaten up overnight but rallied into the opening as the bell rang…..giving us a sense that maybe the US would buck the trend and we did until…..…….…..US trade representative Robby Lighthizer reiterated his pledge from Sunday to ‘enact further tariffs and sanctions on China if the two countries couldn’t reach a deal by the end of the 90 day truce.’ …… and the thrashing started all over again…..the tone changed (went from positive to negative) as nearly every other negative story was dragged out of the closet…..so think weaker oil prices, rising interest rates, unrest in DC,  and broader geo-political European concerns – Italy, France, the UK & the EU……  and the buyers withdrew leaving that void in liquidity……….the selling intensified and  by 11 o’clock it was another disaster…..the Dow and S&P which had breached the November lows now  traded down AND THRU the October lows….at one point the Dow was down over 500 pts while the S&P gave up 50 pts taking both indexes back to the lows seen in March taking both of those indexes into ‘correction’ territory.  (Correction territory is a 10% move from the most recent high) – and by 11 am – the Dow  and S&P were both off by nearly 12% from the September highs….. the Nasdaq is already in correction territory and by 11 am – that index was off 15% from the September highs….

One other note – last week the whole ‘Death Cross’ argument was all the rage…the Death cross happens when the 50 dma breaches the 200 dma on the way down…this is supposed to suggest further weakness ahead….I challenged this and said that I believed the worst was over – that we would challenge the lows already set and then churn a bit but not really go much lower….and that so far has been the case…..yesterday’s selling only took us to a place we had already gone to – it has not really gotten any worse and in fact – found support and rallied…..this morning that rally continues – see below.

Now Remember what I said in yesterday’s note…… – the October lows were the level to watch -  IF  the mkts didn’t hold onto the November lows… (Which we didn’t) it would only be a matter of time (in this case a couple of mins) before we challenged the October lows – and  we sliced right thru those lows ‘like a hot knife thru butta’ and you could feel the angst and you could feel the ‘free fall’…………Before you knew it the S&P broke thru 2600 and traded as low as 2583, the Nasdaq breached 6922 to trade as low as 6878 while the Dow breached 24,122 to trade as low as 23,881.  And then without anything specific…..the selling stopped…..everyone sat on the sidelines as they tried to assess the damage and figure out what was next……Tech names – which have been in the spotlight – suddenly began to find bids……and boom – the turnaround began…names like MSFT, CHKP, VMW, PANW, INTC, QCOM, AMD, IBM, ORCL, CTXS, FB, TWTR, NFLX all led the charge…..Defense names also joined in the party as the Pentagon reported that they will boost their budget request….so NOC, HRS, LLL, LMT, GD & RTN all surged….

Small and mid-cap stocks were not able to regain their footing and are now at the lowest level all year, Financials continue to be a drag as expectations for slower growth and the possible inversion of the yield curve is holding those names in check.  The spread between the 2’s and the 10’s now stands at 0.129 percentage points………putting us ever closer to the inversion that typically signals a coming recession…. Energy stocks also fell as many are now questioning if OPEC can really cut production enough to crimp supply – Oil fell 3% taking it back to the $51 range……..which I see as a boon for the economy and a boon for consumers…..maybe not so much for the energy companies – but what are we really talking about here?  Oil isn’t going away…..

This morning – European stocks are higher and US futures which were down again overnight – have now rallied into positive territory swinging 30 pts from last night’s lows to this morning’s highs… S&P futures are currently up 14 pts or 0.5% while Dow futures are up 160 pts and Nasdaq futures looking higher by 53 pts.  News is out that Stevey Mnuchin has discussed a timetable for trade talks with Chinese Vice Premier Liu He is helping the overall tone…Look for the S&P to find support at the October lows (again) around 2610 ish….while real resistance can be found at 2755 ish.  If we are able to focus on the positives – we could see the mkt rally and attempt to re-challenge that resistance level in short order…all we need is a couple of positive headlines and watch how fast the sell side dries up leaving that void in liquidity forcing the buy side algo’s to take the mkt higher. 

Eco data today includes PPI of 0%, but ex food and energy of +0.1%, PPI y/y is expected to come in at +2.5%  which would be down from last month’s 2.9% and this is good because it shows less upside pressure on prices – think inflation. 

Oil was once again under pressure as so many analysts/traders questioned whether or not OPEC/Saudi’s could cut production enough to cut supplies……I guess the answer to that question is no….  But this morning – oil is seeing a bid as Libya’s largest oil field was taken over by a militant group forcing a shutdown.  Oil is up 50 cts a barrel to $51.57 as it struggles to hold the line and remain in the $50/$55 trading range. 

Gold is up another $4 at $1,253/oz and remains a good hedge against so much of the mkts risk.  Gold is now up 5% form the November lows and could move up another $20 or so before it hits resistance at $1,274/oz.  If we see some stability and calm in the equity mkts we could see gold pull back to the $1,225 level – but my sense is that equity volatility is here for a while – so my gut tells me that Gold will go higher before it goes lower.