by Danny Riley

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Rising Yields, Inflation Worries, and the Fed’s Rate Conundrum

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Our View

Smarter money is taking profits, and Warren Buffett has been selling for months. I don’t follow his positions closely, but he has reportedly been liquidating his AAPL holdings for over six months. According to an analysis by Bespoke Investment Group, there hasn’t been a single session in December where more stocks in the S&P 500 gained than declined. By their calculations, this marks the longest such streak in more than 20 years.

Some believe the market will get a boost when Trump takes office, but I also think there is going to be a lot of headline confusion and that will create a big jump in volatility.

Our Lean

Heading into this week’s Fed rate cut decision, the U.S. bond market sank deeper. The treasuries are on track for their worst week in more than two months with the yield on the 10-year benchmark rising to 4.40%. I went to get gas yesterday and the price of premium jumped $0.25 in just two days. As I’ve said a million times, I’m not an economist, but how can the Fed keep cutting rates with bonds dropping and inflation rising? While I’m not saying there is an immediate crisis, I believe there is reason to be concerned.

Also, it’s worth mentioning that the PitBull hasn’t been buying stocks. In my 45 years of knowing him, he’s consistently worked on his stock list and he still does but he hasn’t been buying, he has been trading gold and Bitcoin ETFs instead.

Our lean: I went long one ES contract at 6051.50. I’m not certain it will work, but I think the YM is setting up for a bounce. You can buy the early weakness and sell the rallies. I think the Fed wants to put a happy face on the markets this week. Don’t forget, this is rollover week and also December options expiration week.

MiM and Daily Recap

The ES gapped up on the open of the Globex session and never filled in overnight, grinding back up to the overnight high of 6085.25 before opening the regular session at 6077.25. A 14-minute move up to re-test the high fell short at 6084.75, after which a failure ensued as the markets seemed a bit spooked by the follow-through rally in the bond markets.

Knifing back through the open and breaking the next level of 6072.75, the ES quickly dropped to the 6040 level where it paused for a bit before falling again on some large volume at 10:40 AM down to its 11:14 AM low of 6043.50. A 30-minute bounce brought it back to 6060, which swiftly failed as more sellers came in and pushed the market to the day’s low of 6041.25 at 1:00 PM.

From there the next bounce began working its way higher over the next 90 minutes to reach 6059.75 at 2:32 PM. However, this marked the start of a sideways-to-downward drift for the next hour. By 3:21 PM, the ES hit 6050.75, holding steady before rallying back to 6060.25 at 3:39 PM. This set up a volatile, whipsaw action leading into the 3:50 PM MIM (Market-on-Close Imbalance) release.

Initially flat, the imbalance turned into $1.5 billion to sell within a minute of the release, dropping the ES a bit into the cash close at 6055.50. Post-market selling pushed the ES down to 6047 as the sell imbalance was absorbed. A small amount of covering brought the ES back to its settle price of 6051.25, down 9.50 points (-0.16%) for the session.

The NQ closed at 21,760.50, up 109.25 points (+0.5%), setting another new all-time high closing price. ES volume rose sharply to 1.875 million contracts traded, its largest since the day after Election Day, while NQ volume increased to 623K contracts.

While extended weakness in the bond markets and continued relative weakness in the Russell and Dow seem to have put a dent in the rally, the rotation and relative strength in NQ and the Mag.7 off the morning low showed simultaneous resiliency, suggesting Friday may have been some standard position adjusting ahead of the weekend and the Fed meeting this week.

For the long-term readers, you know I sometimes get caught between saying buy weakness while pointing out the negative. I did warn people about how much the ES and NQ had rallied since the October lows and talked about how the stats are weak going into the middle of December, it just came a little early. Clearly that weakness can be seen in the Dow’s 7-day decline of 1366 (-3.02%) points while the NQ closed higher for the fourth week in a row. In terms of the market’s overall tone, the sellers are winning. In terms of the ES’s overall trade after weeks of a low volume grind higher, the sell-offs have pushed it up to 1.875 million.

How to read the MIM

Technical Edge

Fair Values for December 16th, 2024:

SP: 78.28
NQ: 308.13
Dow: 529.88

Daily Breadth Data 📊

NYSE Breadth: 34% Upside Volume
Nasdaq Breadth: 45% Upside Volume
Total Breadth: 44% Upside Volume
NYSE Advance/Decline: 33% Advance
Nasdaq Advance/Decline: 35% Advance
Total Advance/Decline: 34% Advance
NYSE New Highs/New Lows: 40 / 113
Nasdaq New Highs/New Lows: 129 / 227
NYSE TRIN: 0.89
Nasdaq TRIN: 0.62

Weekly Breadth Data 📈

NYSE Breadth: 40% Upside Volume
Nasdaq Breadth: 52% Upside Volume
Total Breadth: 49% Upside Volume
NYSE Advance/Decline: 27% Advance
Nasdaq Advance/Decline: 33% Advance
Total Advance/Decline: 30% Advance
NYSE New Highs/New Lows: 237 / 141
Nasdaq New Highs/New Lows: 497 / 359
NYSE TRIN: 0.89
Nasdaq TRIN: 0.63

MTS Levels:

How to read/use the MrTopStep Levels

Room Summaries:

Polaris Trading Group Summary Friday, December 13, 2024

Morning Preparation:

David’s Open: Key links and resources, including the Daily Trade Strategy, were shared to set the day’s trading foundation.
David outlined the bull scenario at 9:30 AM, stating that prices sustaining above 6065 would target the 6075–6080 zone, which was quickly fulfilled.

Key Trades and Observations:

NQ Performance:
- A strong push out of the Open Price Range (OPR) with early long positions hitting targets.
- Internals displayed divergence following the RTH open.
CL (Crude Oil):
- All Open Range long targets were achieved early, with a stop trail placed at entry.
ES (E-mini S&P 500):
- Price broke below the 6065 Line in the Sand (LIS) around 10:42 AM, shifting focus to lower targets per the Daily Trade Strategy.
- A reversal occurred near the 6044 ADR tag, signaling potential bullish recovery.

Positive Trade Highlights:

NQ and CL: Early precision in identifying and fulfilling long targets demonstrated a solid read on the market’s momentum.
ES Reversal: The price reversal from the ADR level at 6044 showcased a lesson in respecting key support zones for potential entries or exits.

Lessons and Market Insights:

The importance of adhering to key levels like the LIS (6065) and leveraging them as turning points for trade scenarios.
Divergence in internals served as an early warning of potential shifts in market direction.
Observations on volume profile and TPO charts aided traders in staying aligned with the market’s flow.

Afternoon Note:

David signed off mid-day for personal commitments but left the charts active for continued reference. He reminded traders to “go with the shift” and stay aligned with the strategies outlined earlier.

Summary: Friday’s trading emphasized preparation, execution, and flexibility. Early long trades on NQ and CL set a positive tone, while the ES trade reversal at a key ADR level offered a good example of responsive trading. Clear communication from David and active participation from the room fostered a collaborative environment, yielding both profits and learning opportunities.

DTG Room Preview – December 16, 2024

This week is critical for markets with the Federal Reserve’s final meeting of the year. A 25-basis point rate cut is anticipated (97% likelihood per FedWatch), and market attention will focus on Chair Powell’s press conference and the updated December dot plot. While economic growth persists and the labor market shows resilience, the path to the Fed’s 2% inflation target remains uneven, suggesting fewer rate cuts in 2025.

Key economic data includes Flash PMIs, Retail Sales, GDP, Empire State, Philly Fed, UoM Consumer Sentiment, and the Core PCE Price Index. Notably, volatility surged last Friday but is expected to taper after the PCE release.

In equities, last week saw mixed performance. The Nasdaq 100 rose 0.3%, but the S&P 500 fell 0.6%, and the Dow Jones dropped 2%—marking a 7-day losing streak, its longest since February 2020. Alarmingly, smaller-cap S&P 500 stocks under-performed, indicating potential fragility beneath the surface of large-cap-driven index gains.

Other Notables:
- MicroStrategy (MSTR) will join the Nasdaq 100 on Friday, reflecting the growing influence of Bitcoin, which recently hit $106,493 on optimism about a potential crypto-friendly Trump administration.
- Corporate earnings this week feature Micron (MU), Nike (NKE), FedEx (FDX), and Carnival Corp (CCL). No major earnings releases today.
- The economic calendar highlights Empire State Manufacturing Index (8:30 AM ET) and S&P Global PMIs (9:45 AM ET).
In futures, the ES contract has moved into a new trendline setup, providing room for both bullish and bearish strategies. Key levels include potential resistance at 6261-6279 and support at 5973-5978.

Stay tuned for updates as markets digest a busy week of data and events.

ES Week vs. Week

We have rolled charts to H25 contracts. Topside, watching for 6171 for the bulls to show they still have some strength at these levels. Downside, 6086.50 and then 6042.75. We would not question this bull run until a close below 5977.25, our solid red line.

NQ Week vs. Week

NQ is also on H25 contract. Our bullish run questioning would begin with a close below 21,203. For now, a touch of 22,300 would be a good strength target for the bulls. A hold of 22,068 would be a m indication for low volume grind and 21,814 for a longer bull hold.