What started out as a perfect Turnaround Tuesday ended as a Tuesday flunk-a-dunk. We make no bones about it. The ESH15 gapped 9 handles higher and then took off to the upside, but it wasn’t the rally people will remember, it will be the 49.5-handle selloff that followed. The decline was the largest single selloff since Oct. 15.
Most floor traders we talked to said they were concerned about the ever-changing outlook of the European Central Bank’s policy and the prospects of new ECB stimulus in the coming months. There is no doubt how important the ECB is to US stocks right now, and markets on both sides of the Atlantic seem to be waiting for the ECB’s next move. The consensus is that the ECB will pursue further stimulus in the form of sovereign bond purchases. The sharp decline in oil prices and uncertainty about Europe have made for a riskier trading environment.
With stocks going into their sixth year of the bull market, valuations of US stocks will have to rise more if the stock market is to show any returns. With the economy nearing its 60th straight month of private sector job creation and the cost-savings from lower energy prices, higher valuations are still possible, especially if the ECB takes over providing stimulus just as the Fed looks about to raise rates and the dollar keeps getting stronger. While MrTopStep remains bullish, we also think there is a lot of uncertainty out there. According to FactSet, the S&P 500 is trading at 16.9 times its earnings for the past year and above its 10-year average of 14.6. The road to further stock market growth will likely be a bumpy one.
S&P futures down 7 of the last 9, down 3 in a row
So far volatility has seen a swift uptick in 2015. Most traders are starting to think that volatility will continue and point out that the steep drop in oil, European economic weakness and the prospects of a rise short-term interest rates has been the main driver of the Chicago Board Options Exchange’s volatility index (VIX). While many investors are concerned there is still too much cash on the sidelines waiting to jump in, there seems to be little doubt that 2015 could be a year of much weaker performance.
Earnings
The slump in oil prices is expected to weigh on fourth-quarter earnings. FactSet.com revised its Q4 earnings growth estimate to just 1.1%, far lower than the Sept. 30, 2014, prediction of 8.4%. The energy sector, predictably, is doing worse than others. The bigger picture is one of strong economic growth in the US, virtually no growth in Europe for the last several quarters, and slowing growth in China.
The dollar remains strong, with some analysts predicting Euro parity with the dollar by 2016 if current trends continue. However, the same lower energy prices that are lowering earnings right now will also lower overhead costs and infrastructure costs in the long term if they stay low or lead to greater investment in non-fossil fuel energy. That long-term strengthening of balance sheets across the board is not yet reflected in the numbers currently driving (and occasionally panicking) the markets.
In Asia 10 of 10 markets quoted closed lower and in Europe 11 out of 12 markets are trading lower this morning. On today’s economic calendar: the MBA purchase applications, retail sales, import-export prices, Atlanta Fed business inflation expectations, business inventories, EIA petroleum status report, 30-year bond auction, Beige Book and earnings from JPMorgan Chase (NYSE: JPM), Shaw Communications (NYSE: SJR) and Wells Fargo (NYSE: WFC).
Up and down and all around in 2015
Our view: What if I said I didn’t have an opinion? Well, that’s actually where I am today in my overall view of the S&P. There have been nine trading days this year. The first four had the S&P off to a very negative start. The next two brought the S&P back up. Now it has spent the last three days plunging back down. So it is a good question… Is the S&P going up or down in the beginning of the year? My opinion is that we go up slightly but will see both sides of the card. Not necessarily alternating big rallies and selloffs, but volatility big and small. Scalpers may need to set wider stops and longer-term investors will need to hedge or accept bigger drawdowns. Technically, we are in a downtrend and only 20 handles from a retest of the January 6 low of 1984.50, with trendline support at 1996, 1994, and 1990. If we make a new low, look for initial support at 1975 and 1966.
FREE WEBINAR! Why You Should Be Trading Bonds In 2015
January expiration study: https://mrtopstep.com/january-expiration-statistics/
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 10 of 10 markets closed lower: Shanghai Comp. -0.40%, Hang Seng -0.43%, Nikkei -1.71%
- In Europe 11 of 12 markets are trading lower : DAX -0.39%, FTSE -1.80%, MICEX +0.11%, GD.AT -0.20% at 6:30 am
- Fair value: S&P -6.13 , NASDAQ -6.01 , DOW -72.57
- Total volume: 2.48mil ESH and 12k SPH traded
- Economic schedule: MBA purchase applications, retail sales, import-export prices, Atlanta Fed business inflation expectations, business inventories, EIA petroleum status report, 30-year bond auction, Beige Book and earnings from JPMorgan Chase (NYSE: JPM), Shaw Communications (NYSE: SJR) and Wells Fargo (NYSE: WFC).
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