U.S. markets closed sharply lower Friday, as Wall Street braced for a partial government shutdown and slowing global growth.
The losses punctuated five days of selling pressure with fresh 52-week and multi-year lows now in focus.
The Dow joined the other major indexes after officially forming a death-cross and has followed the Transports lower as the two tend to trade in tandem.
Surprisingly, volatility stayed relatively calm despite the continued market pullback but did close at its highest level since early February.
The Russell 2000 plummeted 2.6% following the intraday drop to 1,289 and close below the 1,300 level. Longer-term support is at 1,275-1,250 on continued weakness and represents prior resistance from August 2016.
The Nasdaq tanked 1.6% after testing a low of 6,304. September 2017 support at 6,300-6,250 held with a move below the latter getting 6,200-6,150 in play.
For the week, the Nasdaq dropped 8.4% while the Russell 2000 sank 7.6%.
The Dow stumbled 1.8% after testing an intraday low of 22,396. Lower support at 22,600-22,400 held into the close with backup help at 22,250-22,000 on a close below the latter.
The S&P 500 was rocked for 2.1% after bottoming at 2,408 intraday. Major and upper support from July 2017 at 2,400-2,375 held with risk to 2,350-2,300 on a move below the latter.
The S&P 500 fell 7.1% for the week while the Dow slid 6.9%.
There was no sector strength for the 5th-straight session with heavy losses for the week.
Communication Services and Technology were the weakest sectors after giving back 3.3% and 3%, respectively. Energy plunged 10% for the week while Consumer Staples and Consumer Discretionary were hammered with losses of 7.7% and 7.5%.
No earnings update.
Global Economy
– European markets showed strength despite flat economic data while ending the week with heavy losses.
Germany’s DAX 30 rose 0.2% and UK’s FTSE 100 climbed 0.1%. France’s CAC 40 was up 2 points, or 0.04% and the Stoxx 600 Europe added a tenth-point, or 0.03%. The Belgium20 slipped 0.2%.
German January GfK consumer confidence was unchanged at 10.4, topping expectations for a dip of 0.1 to 10.3.
UK December GfK consumer confidence fell -1 to -14, matching forecasts.
Asian markets settled mixed following signs China’s government will boost stimulus to prop up their economy. A statement from officials said significant cuts to taxes and fees will be enacted in 2019 and monetary policy will remain prudent.
Japan’s Nikkei sank 1.1% and China’s Shanghai declined 0.8%. Australia’s S&P/ASX 200 was lower by 0.7%. Hong Kong’s Hang Seng advanced 0.5% and South Korea’s Kospi edged up 0.1%.
Japan November national CPI rose 0.8% year-over-year, matching forecasts. November national CPI ex-fresh food was up 0.9% year-over-year, weaker than expectations of 1%. November national CPI ex-fresh food & energy gained 0.3%, missing estimates of 0.5%.
Durable Goods Orders rose 0.8% in November, weaker than estimates for a print of 1.5%. Transportation orders rebounded a modest 2.9% from the prior 12.3% slide. Excluding transportation, orders fell 0.3% versus 0.4% previously.
Nondefense capital goods orders excluding defense dropped 0.6% from 0.5% while shipments were up 0.7% versus -0.4%.
Non-defense capital goods shipments ex-aircraft were -0.1% versus 0.8% previously. Inventories increased 0.3% from 0.2 while the inventory-shipment ratio dipped to 1.61 from 1.62.
GDP growth was nudged down to 3.4%. This compares to Q2’s 4.2% clip, and the 2.2% from Q1. Consumption was revised lower to 3.5% from 3.6%.
Business fixed investment was lowered to 1.1% from 1.4%, with nonresidential spending unchanged at the prior 2.5%. Residential spending was cut to -3.6% versus -2.6% while government spending was unrevised at 2.6%.
Inventories added $126.6 billion from $123.4 billion. Net exports subtracted -$108.7 billion versus -$104.8 billion. The deflator was bumped up to 1.8% versus 1.7%, with the core rate at 1.6% from 1.5%. On a 12-month basis, the headline was steady at the prior 2.3% year-over-year pace, and the ex-food and energy component was also unchanged at 2.2%.
Consumer Sentiment rose 0.8 points to 98.3 in the final December reading, after falling 1.1 points to 97.5 in November.
The current conditions index paced the gain, rising to 116.1 from 112.3 in November. Consumer expectations fell to 87.0 versus 88.1.
The 12-month price index slowed to 2.7% from November’s 2.8%. The 5-year index also softened to 2.5% from last month’s 2.6%.
November Personal Income rose 0.2% while Spending increased 0.4%, versus expectations for a rise of 0.3% for both. The 0.5% gain in October income was not revised, while the 0.6% rise in spending was nudged to 0.8%. Compensation was up 0.2%, versus the 0.4% gain previously. Wages and salaries climbed 0.2% versus 0.4%. Disposable income was up 0.2% from 0.5% while the savings rate dipped to 6.0% from 6.1%. The PCE chain price index edged 0.1% higher versus 0.2% previously, with the core rate unchanged at 0.1%. Compared to last November, the headline price index slowed to 1.8% year-over-year versus 2%, with the ex-food and energy component slightly rising to 1.9% from 1.8%.
The Kansas City Fed Manufacturing Index for December checked at 3.
Corporate Profits after-tax were up 6.1% for the year.
Baker-Hughes reported the U.S. rig count was up 9 rigs from last week to 1,080, with oil rigs up 10 to 883 and gas rigs down 1 to 197.
The U.S. Rig Count is up 149 rigs from last year’s count of 931, with oil rigs up 136 and gas rigs up 13. The U.S. Offshore Rig Count is up 1 rig to 24 and up 5 rigs year-over-year.
Market Sentiment – New York Fed John Williams said the Fed is looking carefully at the data, and communicating with contacts, in justifying the latest rate hike. He stressed data dependence also means listening to the markets.
Williams said the economy is strong and the Fed made some important changes in its statement, including going to “judges” from “expects” in November. They also put the word “some” in front of the gradual phrase.
And they added, which Williams viewed as important, that the Committee is monitoring global conditions and is attuned to the possibility that the outlook may change in coming months.
Williams said the Fed is open to reassessing and reevaluating its forecasts as data indicate. On the balance sheet on auto pilot, he noted the Fed indicated in June 2017 statement that it would reconsider the normalization path if the outlook changed materially. So far, the baseline forecast is for continued solid growth, with inflation around 2%.
The outlook for 2 hikes next year is based on expectations for strong growth ahead, Williams said. He acknowledged some loss of momentum in the economy, but didn’t seem overly concerned.
The Fed did alter it’s policy path, trimming the dots, due to its revised views on the economy.
On tariffs, there’s a tone of uncertainty among contacts, and as evident in the markets, though so far there’s been no real discernible impact on the economy in general.
Cleveland Fed Loretta Mester said the economy is doing quite well and said she looks at what is going on in the financial markets.
Shes said the Fed is trying to balance both sides of the dual mandate and added she has seen some softening in interest-sensitive sectors and the global outlook has softened somewhat.
Mester went on to say business fixed investment has not been as strong, but said there is some evidence it may be picking up.
She said negative consumer sentiment could feed into the real side of the economy, so the Fed is monitoring.
The iShares 20+ Year Treasury Bond ETF (TLT) closed lower for the 2nd-straight session following the backtest to $120.39. Support at $120.50-$120 was split but held with a close below the latter signaling additional weakness.
Lowered resistance is at $121.25-$121.75. A close above $122 would be a bullish signal for higher highs.
RSI is signaling slightly overbought levels with resistance at 80. Support is at 75-70 with a move below the latter likely leading to additional weakness.
Market Analysis – The Spiders Dow Jones Industrial Average ETF (DIA) fell for the 5th time in
6 sessions following the pullback to $223.85.
October 2017 support at $223.50-$223 held with risk towards $222.50-$220 on a move below the latter.
A death-cross is close to forming with the 50-day moving average on the verge of falling below the 200-day-day moving average. This technical pattern often signals lower lows down the road.
Lowered resistance at $224.50-$225 with continued closes back above $227.50 signaling a possible near-term bottom.
RSI is showing extreme oversold levels with August 2015 support at 20-15. Near-term resistance is at 30 with a move above 35 signaling additional momentum and a relief from the current selling pressure.
The Real Estate Select Sector Spider (XLRE) closed in the red for the 5th time in 6 sessions after tapping a low of $30.92. Fresh support is at $30.75-$30.50 with a move below the latter signaling additional weakness. The 52-week low is at $29.17.
Lowered resistance at $31.25-$31.50 and the 200-day moving average with the 50-day moving average showing signs of to rolling over.
RSI is in a downtrend with support at 30. A move below the latter would signal additional weakness towards 25-20. Resistance is at 35-40.
The percentage of Nasdaq 100 stocks trading above the 200-day moving average closed Friday 11.65% and the session low.
February 2016 support is at the 10% level and is signaling a possible near-term buying opportunity. Lowered resistance is at 15%-20% with a move above the latter signaling additional strength.
The percentage of S&P 500 stocks trading above the 50-day moving average settled at 5.96% with the session low tapping 5.76%.
Mid-January 2016 support at 5% held with the low reaching 3.97. The late August 2015 low reached 4.78.
Both times, massive rebounds north of 80 came shortly afterwards and within 6 weeks. Fresh resistance is at 7.50%-10%.
Existing Position Update
We stopped taking long speculative positions till we see evidence of directional bias once again.
There’s a good chance stocks will stop the downwards bleeding and begin trending once again over the near term.
There’s a fair chance that volatility will remain strong and stocks will lack direction till China is no longer an issue.
That can take few more months of non directional trading action.
I urge you to lower your exposure across the board till volatility levels decline.
Roger