Morning Minutes 12/21/2018

Morning Minutes

Quadruple Witching, Market Volatility  and Relative Strength

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At SIA Wealth Management everything we do is based on Relative Strength Analysis. We evaluate the Relative Strength between asset classes giving us insight into money flows on a large scale, and from this select top ranked investments.

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

Another volatile and brutal week for stocks comes to a head today. The combination of this being the last full trading week of the year, the upcoming holiday slowdown, economic news, tax loss selling/fund redemptions, talks to avert a potential US government shutdown and Quadruple Witching Day (where several major futures and options contracts expire) have created a toxic brew that could lead to big swings in the market today.

We have already seen significant moves in both directions overnight. The Hang Seng gained 0.5% amid talk of China potentially cutting taxes and easing monetary policy to get its economy going next year. On the other hand, the Nikkei dropped another 1.1% while in Europe, the Dax and FTSE are pretty much flat.

US index futures were lower earlier in the morning but have been steadily climbing since about 7:45 am EST and appear close to crossing into positive territory. It remains to be seen if the bulls can get their heads back above water or if the bears will use the opportunity for another round of Whack-A-Mole like we have seen so many times in recent months.

Today’s US economic news was nothing to write home about, Q3 GDP was revised down slightly to 3.4% while Q3 inflation was revised up to 1.5%, a sign of stagflation. Durable goods orders disappointed as well, growing 0.8%, well short of the 1.6% street estimate. Investors reacting positively to soft US data today while totally ignoring last week’s positive US retail sales and industrial numbers shows how the current big selloff has disconnected from economic news and taken on a life of its own.

 

Relative Strength and Sector Rotation Report:

Just as the old saying a rising tide lifts all boats in a bull market, a falling tide in a big selloff separates the stronger swimmers from those left high and dry.

Although the current selloff has been driven more by broad based factors like trade, money flows and tax loss selling rather than specific company events, relative strength analysis indicates there has been a significant difference in performance between sectors.

In the US, higher volatility has increased interest in defensive groups like Health Care. Falling treasury yields and expectations of fewer North American interest rate hikes have sent the usually quiet and boring interest sensitive groups like Utilities and Real Estate climbing up the rankings on both sides of the border. Higher volatility has sparked broader flows into traditional defensive havens like Gold, which has sparked renewed interest in gold mining stocks. This trend has emerged more clearly in Canada where more gold stocks are included in major indices than in the US.

Falling oil prices have weighed on Energy stocks on both sides of the border. Canadian energy stocks were hit harder in the late summer and early autumn as the Canadian oil price cratered first. With the US oil price closing the gap by falling faster lately, Canadian energy stocks have started to rebound relative to their US counterparts.

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