Thursday’s trade was another great example of what the PitBull calls ‘water in the bath tub.’ Big drops and big rallies capped off with $250 million to buy on the 2:45 CT cash imbalance. At 9:40 last night the Bank of Japan pre-empted further economic setbacks by adopting a negative interest rate policy stance, and the ESH16 roared up to the 1903.00 area, up 21 handles from the close.
Did the Fed Hike Rates Too Early?
I could do all the ups and downs of the S&P but I think the chart above says it all. It’s been a very volatile start to the new year. Many are now comparing this year to the start of 2008 at the height of the credit crisis. I remember clearly how the credit crisis started, and supposedly ended, and I question if was really ever ended. What has occurred since the Fed raised interest rates has clearly put an end to the zero borrowing cost / easy money trade, but does that mean the S&P can’t go higher? I think that is still up for debate. With the fed credibility seemingly on the line, will they continue to push for higher rates while admitting the global market turmoil? We do not think so, but the fed has also backed itself into a corner that it either can’t seem to get out of, or doesn’t want to.
It’s hard to love the markets right now. Despite the 106 handle rally in the ESH16 the overall tone of the markets remains one of failed rallies. Based on the start of the year, the fact that the Dow, S&P and Nasdaq all fell 10% by the middle of January, the S&Ps inability to hold the rallies, and the fact that there are still 11 full months left in the year, there is a big possibility that the S&P continues to fall. I know most indicators are technically oversold but if the S&P starts breaking the 1820 level I think there is a good chance the S&P could fall another 100 to 150 handles. On yesterday’s MrTopStep video I mentioned the word recession. The question is, will the slowdown in China and falling oil prices lead to corporate sales recession?
Yesterday’s earnings continued to point to widespread sales misses and lower guidance through the end 2016. The high level sales misses has many analyst using the ‘R’ word, recession. With the strong dollar and the S&P on track for its fourth straight quarter of declining sales there seems to be some rotten wood floating around in the markets. The dollar’s strength is being pegged as the main reason for a high level of revenue misses. This week several big names such as Procter and Gamble (PG), Johnson and Johnson (J & J) , Coach Inc. (COH), Freeport-McMoRan Inc. (FCX) and Corning Inc. (GLW) all missed revenue estimates for the December quarter. 3M co. (MMM) beat its revenue forecast but revenue 5.4% for a year earlier. According to FactSet data the S&P is on track for its fourth straight season of negative earning sales, the longest such negative streak since the fourth quarter of 2008.
Going into the last trading day of the month we thought it would be a good idea to post all the net changes of the S&P in January.. It’s an astonishing look at a month that started out bad and only got worse. The question today is, will the weakness continue into the end of the month and into February, or will the buyers reappear? To tell the truth we just don’t know.
| Date | High | Low | Close | Net change |
| 1/4/2016 | 2043.50 | 1980.25 | 2009.00 | -26.50 |
| 1/5/2016 | 2017.00 | 1992.25 | 2011.75 | +2.75 |
| 1/6/2016 | 2013.25 | 1970.50 | 1986.00 | -25.75 |
| 1/7/2016 | 1991.00 | 1928.50 | 1933.00 | -53.00 |
| 1/8/2016 | 1964.75 | 1910.00 | 1911.50 | -21.50 |
| 1/11/2016 | 1929.00 | 1892.50 | 1914.25 | +2.75 |
| 1/12/2016 | 1940.25 | 1899.00 | 1925.00 | +10.75 |
| 1/13/2016 | 1946.50 | 1878.00 | 1881.50 | -43.50 |
| 1/14/2016 | 1927.50 | 1871.00 | 1914.50 | 34.00 |
| 1/15/2016 | 1921.00 | 1849.25 | 1875.00 | -39.50 |
| 1/19/2016 | 1907.50 | 1856.25 | 1873.00 | -2.00 |
| 1/20/2016 | 1878.50 | 1804.25 | 1855.00 | -18.00 |
| 1/21/2016 | 1883.25 | 1836.25 | 1861.00 | 6.00 |
| 1/22/2016 | 1855.75 | 1902.25 | 1899.25 | 37.75 |
| 1/25/2016 | 1904.25 | 1867.50 | 1870.25 | -29.00 |
| 1/26/2016 | 1899.75 | 1851.25 | 1896.00 | 25.75 |
| 1/27/2016 | 1910.00 | 1864.50 | 1875.00 | -21.00 |
| 1/28/2016 | 1902.50 | 1865.75 | 1880.75 | 5.25 |
In Asia, 11 out of 11 markets closed higher (Shanghai Composite +3.09%), and in Europe 9 out of 12 markets are trading higher (DAX +0.41%). Today’s economic calendar includes US GDP, Employment Cost Index, Chicago PMI, Consumer Sentiment, Baker- Hughes Rig Count, John Williams from the fed speaks, Farm Prices, and earnings from American Airlines Group Inc (AAL), Chevron Corp (CVX), Colgate-Palmolive Co (CL), Honeywell International Inc (HON), Mastercard Inc (MA), Phillips 66 (PSX), Tyco International PLC (TYC), Whirlpool Corp (WHR), and Xerox Corp (XRX).
BOJ, Negative Rates and a Big ESH RIP
Our View: I still think 1920 in the ESH is still in the cards, but the longer it takes combined with all the failed rallies, the ES could be saying something different. That said today will be a test of the S&P’s ability to hold going into the weekend. Friday’s this year have been weak with a single exception. Last night the ES traded as high as 1903.25 and sold off down to 1879.25. At 6:15 CT it is trading 1897.50, up 15.50 handles. Our view, sell the early rallies and buy weakness. The big concern is can the futures hold?
‘The S&P 500 Futures and the January Month End’
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- In Asia 11 out of 11 markets closed higher : Shanghai Comp +3.09%, Hang Seng +2.54%, Nikkei +2.08%
- In Europe 9 of 12 markets are trading higher : CAC +0.68%, DAX +0.41%, FTSE +1.00% at 5:15am CT
- Fair Value: S&P -7.08, NASDAQ -9.24, Dow -87.13
- Total Volume: 2.25mil ESH and 2.9k SPH
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