Friday’s trade topped off a bad month for the S&P, and if you follow the old adage of “How January goes, goes the year,” then February could get off to a rough start. We thought there could be some month-end buying by the mutual funds, and despite the big rally Thursday the S&P did exactly what it’s done all year: it reversed lower on Friday.
Fridays have not been kind to the stock market this year, and the last Friday in January was exceptionally bad. After the S&P futures (ESH15:CME) traded up to the 2019 area on Thursday, it looked like they were set for a rebound. Then the futures started going down during Thursday night’s Globex session, opened sharply lower, and started to sell off after Friday morning’s 8:30 CT open.
The S&P (^GSPC:SNP), Dow (^DJI:DJI), and Nasdaq (NQH15:CME) were in a downtrend all week, but like many declines lately the ESH15 started to short-cover and staged a 14-handle rally from the early low to the 1:35 PM CT high at 2017.25. From there it became a case of rallying too early and the S&P unable to hold it. The market predictably ran the sell stops, the buy stops, and then the sell stops again. At the end of Friday’s trade the S&P closed down 30.1 handles or 1.2% and the Dow closed down 335 or down 1.45%. For the month of January, the S&P closed down 3.1% and the Dow lost 3.1%, the worst declines since January 2014. The Nasdaq futures closed down 44.5 points on Friday or down 1%.
2015 volatility jump
S&P 500 posts biggest decline in 7 weeks (fastFT article)
January and February of 2014 also started out with a big jump in volatility, but as the stock market goes into its 6th year of the uptrend, the bull is starting to look tired. Stocks fell Friday for a number of reasons, but the main reason was the Commerce Department’s gross domestic product, which expanded to an annual rate of 2.6% in the fourth quarter after an expansion of 4.6% in the second quarter and 5% in the third quarter.
In December we started warning people of the potential jump in volatility and we continue to warn that the recent surge is not over. The big drop in crude oil prices, the continued problems in Europe and the change in Greece’s leadership have all weighed on US stocks.
Crude goes its own way
While the S&P was going down on Friday, crude oil was going up. Crude oil futures (CLH15.NYM) rose 8.3% to $48.24 a barrel on Friday’s close, pushing energy companies in the S&P up +0.7%. Of the 10 S&P sectors, energy was the only one to close higher, but it did not provide any support to the broader market. For the last few weeks we have said crude oil was oversold and that it was seeing some back-and-fill price action, but it took Goldman Sachs slashing its forecast to get the market to act. Goldman said fuel prices needed to stay low for much longer to curb production and end a global supply glut. Goldman Sachs’s oil analysts, led by Jeffrey Currie, said the current selloff that started six months ago and took oil prices down 60% would eventually balance the market. They added that crude oil prices, having broken below $50 a barrel, could drop as far as $30 before they rebound. Crude oil will continue to be a main driver of the markets, but the S&P and oil seem to have detached somewhat. It may be worth remembering that in 2008, when crude was near $150 a barrel, Goldman Sachs predicted it would trade up to $200. It never got that far, and we are skeptical about $30 a barrel, which would almost certainly be below the real production costs. We expect the low to be around $39.
Greece wants debt relief but no bailout
Greece is another sore spot for the markets. Greece still has a debt of €315bn or about 175% of GDP, even after creditors renegotiated and wrote down debts in 2012. Greece’s leftist anti-austerity Syriza party pledged in its campaign to write off half the debt. However, the new government also ruled out receiving a new tranche of the bailout package. The challenge now is for Greece to pay down its debt without accepting further outside money.
German Chancellor Angela Merkel has ruled out debt cancellation, saying creditors had already made concessions. While Germany and France are working to persuade Greece to continue to pay its debt, most feel a deal will be hard to reach. Greek finance minister Yanis Varoufakis said Greece and its partners had to proceed “with one objective in mind – the prosperity of the average European citizen.” At the same news conference, French finance minister Michel Sapin reiterated that “there is no question of canceling the Greek debt.”
While that statement gave needed reassurance to French and German citizens tired of dealing with the debts of other countries, the public and the markets will have to note at some point that Greece isn’t necessarily asking for a cancellation. That “half” number, after all, was campaign rhetoric.
In the end, a successful negotiation will likely allow both sides to save face. The French and Germans can call it a restructuring but not a cancellation and the Syriza government can claim that the payments are somehow half of what they might have been.
Europe has to get to such a deal to prove the viability of the Eurozone concept. But until it does, the markets will live in uncertainty and express that uncertainty as volatility. Perhaps a springtime in Paris is coming, but expect some winter storms before then.
QCHA and TRIN
Our view: The Dow and S&P are down 4.9% and 4.6%, respectively, from their record highs. There is a laundry list of possible reasons: disappointing earnings and economic reports, the fall in oil prices, the rise of the dollar, and the smaller profits for multinational companies.
Last week two indicators we use went to extremes: the QCHA fell to -130 and the TRIN jumped to 3.5 , the highest level in four years. The QCHA is the unweighted average percentage gain of all traded stocks on the NYSE. Unlike other indices and indicators which give more importance to large stocks, the QCHA measures whether all stocks, large and small, are gaining in value or if a stock rally or drop is being driven by a few big companies.
When the QCHA falls like it did last week, it means there is selling going on under the surface; that’s why every rally fails. On the other hand, when the TRIN moves up like it did, it usually acts as a good buy signal. However, when the TRIN jumped in December, the S&P was on a high and subsequently sold off. This goes with one of my old sayings, that things that used to work don’t and the things that do work don’t last.
In Asia 6 of 11 markets closed lower and 9 out of 13 European markets are trading higher this morning. The first trading week of February will see a significant pickup in earnings and economic reports. The week has a total of 22 economic releases and 11 T-bill or T-bond auctions or announcements. Today’s economic and earnings calendar starts with the Chicago Fed National Activity Index, PMI Services Flash, Dallas Fed Mfg Survey, 3- and 6-month T-bill auctions and earnings from Exxon Mobil (NYSE: XOM), Sysco (NYSE: SYY), The Hartford Financial Services Group (NYSE: HIG), Anadarko Petroleum (NYSE: APC), and Reinsurance Group of America (NYSE: RGA).
Never a dull moment
Our View: After a big rally Wednesday the S&P fell 53.7 handles in two days. As the title says, there has never been a dull moment in 2015 and I expect it to remain that way for some time to come. As we all know, Fridays have not been good for the S&P and Mondays aren’t much better.
Will the S&P that closed horribly continue south or will MrTopStep trading rule about the S&P going “sideways to higher” after a big down day kick in? On one hand, you can only have so many downside retests before the S&P starts taking out support. On the other hand, the ES is oversold. Our view: Mutual Fund Monday has been down 5 of the last 8. We lean to selling the rallies and buying weakness. Today will put the MrTopStep rule to the test that the S&P tends to go sideways to higher after a big down day.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 6 of 11 markets closed lower: Shanghai Comp. -2.56%, Hang Seng -0.09%, Nikkei -0.66%
- Earlier in Europe 9 of 13 markets were trading higher at 5:40 AM CT: DAX +0.49%, FTSE +0.31%, MICEX -0.16%, Athens GD.AT +4.27%
- Fair value: S&P -6.40, Nasdaq -7.79 , Dow -73.47
- Total volume: 2.35mil ESH and 11.6k SPH traded
- Economic schedule: Today’s economic and earnings calendar starts with the Chicago Fed National Activity Index, PMI Services Flash, Dallas Fed Mfg Survey, 3- and 6-month T-bill auctions and earnings from Exxon Mobil (NYSE: XOM), Sysco (NYSE: SYY), The Hartford Financial Services Group (NYSE: HIG), Anadarko Petroleum (NYSE: APC), and Reinsurance Group of America (NYSE: RGA).
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