Morning Minutes 12/20/2018

Morning Minutes

The Powell Plunge: End Of The Current Market Retreat?

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Market Commentary By:
Colin Cieszynski, CFA, CMT
Chief Market Strategist
ccieszynski@siawm.com
+1 (647) 282-4428

Yesterday’s Fed news set off another big wave of selling in stock markets, sparking a nearly 900-point drop in the Dow in under 90 minutes and turning big intraday gains into big intraday losses.  This abrupt plunge rattled many investors, particularly as several US indices broke down and took out their spring lows, but signs have also emerged suggesting that we could now be closer to the end of this year’s market retreat for a number of reasons.

  • This is what capitulation feels like. Over the last several weeks we have see a number of bearish reversals where the bulls attempt to mount an early move only to see bears come in and smash the market back down. Yesterday was a more swift and severe version of a bearish reversal, but at the same time it also had the feeling of a final flush, particularly as US indices finished up slightly off their lows of the day.

 

  • US Markets finally catch down to their peers. Back in the summer, a huge disconnect had emerged between US indices which were hitting all-time highs and overseas markets like the Hang Seng which was down over 20% off its high and the Dax which was down over 10% off its high at that time. This gap has been closed by US stocks going off a cliff and Hong Kong rebounding after bottoming out in October. Yesterday, the Dow Transports entered official Bear Market territory falling over 20% off of their high. The S&P 500 finished down 14.75% off its high while the NASDAQ 100 finished down about 18.5% off its high. While US indices could still have some downside they appear to be closer to a bottom than a top.

 

  • No overseas follow through. Often, when something big happens late in the US trading day, overseas markets react through our overnight hours. This time, the overseas reaction has been moderate. Wednesday saw the S&P 500 finish down 1.5% and the NASDAQ Composite finish down 2.1%. In contrast, Canada’s S&P/TSX only fell 1.0%. Overnight and this morning, Hong Kong, Shanghai and Frankfurt have fallen less than 1.0% with the FTSE down only 0.1%. This refusal to follow the US off a cliff suggests that international markets are already washed out.

 

  • The End (of Tax Loss Selling Season) is Nigh. Much of the persistent selling pressure against stocks and the recent record-breaking wave of mutual fund redemptions appears to have been driven by investors looking to crystallize tax losses to apply against profits made earlier in the year. Tax loss selling deadlines arrive by the end of the month, so supply from this source should dry up in the coming weeks.

 

  • Be Careful What You Wish For… The Fed raised interest rates as expected and eased its hawkish stance as members lowered their expectations for 2019 rate hikes to 1-3 from 2-4. One has to ask, seriously, what were investors looking for? If the Fed went any more dovish than that it could have easily been taken as a sign the US economy was weakening which could have sparked even deeper declines, if not now, than in the coming weeks. As a case in point, in response to the Bank of Japan staying in full on stimulus mode, the Nikkei plunged 2.8% overnight.

 

The fact that the Fed didn’t hit the panic button may have sparked yesterday’s selloff but it also indicates confidence that the markets can start to build on going forward. This also raises the question of some investors were looking to sell yesterday regardless of the news adding to my first point, that the Powell Plunge may have been a final capitulation.

 

  • The Fed is Not Alone. European central banks are steadily turning less dovish as well. This morning, Sweden’s Riksbank raised its benchmark rate for the first time in seven years. A week ago, the European Central Bank ended its asset purchase program.

 

US index futures have been stabilizing this morning trading flat to slightly positive. Investors have been given so many reasons to be fearful and bearish lately that anyone who has an inclination toward fleeing should be doing so by the end of this week. If we don’t see much downward follow-through today, it would suggest that bears have finally become exhausted and could be set to turn the stage over to Boxing Week bargain hunters.

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