Is That a Light at the End of the Tunnel, Or?

In what has to stand out as one of the most dramatic, volatile and unpredictable trading sessions in recent memory, equity markets rallied sharply from extreme intraday losses to post a remarkably pedestrian day-end performance. To no one’s surprise, and as pre-opening futures projected, equity markets opened sharply lower as result of familiar themes; China, crude and the increasingly widely held perception that our own economy is slowing. In fact, a midday look at the markets spoke to a singular theme – risk off. The NASDAQ (-3.7%), S&P 500 (- 3.7%) and Dow Industrials (-3.2%) had tagged meaningful pain onto year-to-date performance. However, the extreme nature of those intraday losses in combination with the losses accumulated over the previous 12 sessions of 2016 led to an oversold condition in the market, effectively triggering a rebound. That rebound, as breath taking as it was, still left all three major equity market indices short of even for the day. The S&P 500 (-1.16%), Dow Industrials (-1.54%) and NASDAQ (-0.13%) lost ground on the session but again, given the condition of the market at midday, investors came away from the session feeling as though they had dodged a bullet. I suspect they haven’t. It was after all another distribution day. It may have laid the seeds for a rebound of sorts but it is entirely too early to tell.

An interesting sidebar to the session was the relative out-performance of the mid-cap and small-cap issues versus the large-cap. For example, the Russell 2000 actually gained +0.45% on the day. The S&P 600 gained +0.30% while the NASDAQ closed just shy of even. Meanwhile the Dow Industrials (-1.54%) and S&P 500 (-1.16%) both underperformed. Normally leadership by small-cap issues speaks to risk-on. However, one day does not a trend make. Additionally, given the bear market status and relative under-performance by small-cap issues and indices in recent quarters, the more likely scenario is simply a reversal of fortunes – nothing more.

Volume on the NYSE (+17.26%) and NASDAQ (+38.29%) expanded aggressively as investors from John Q. public to institutions felt compelled to take action as a result of the worst start to any year in equity market history. Several prominent market technicians are calling for a reversal as a result of yesterday’s price action and volume metrics. However, it is important to keep in mind that the themes that have relentlessly blanketed the market in recent weeks have not gone away and some would argue have not even been fully priced into the market. For example crude. Yesterday crude lost $1.91/bbl or 6.711% to close at $26.55/bbl – a 12 year low. The complete fall out of the collapse of crude is yet to be felt or seen in corporate results for the energy sector and as a result the S&P 500. The trend lower in equity markets has been so thorough and comprehensive thus far in 2016 that Q4 earnings have had virtually no impact on either single stock or broader market price discovery. The risk off trend that has dominated markets has been remarkably blind to corporate results.

Yesterday’s Economic Calendar was interesting and to those that have suggested that we may see the Fed hold off on a move in rates in March I would suggest a close look at the CPI report that was released yesterday. The top line CPI M/M change was – 0.1% versus expectations for 0.0%. Less food and energy the M/M change was 0.1% versus expectations of 0.2%. Most importantly, the CPI less food and energy Y/Y change was 2.1%. That Y/Y reading of 2.1% does speak to target. Any suggestion that the Fed will hesitate to move on rates as a result of the markets recent gyrations is premature. Yesterday’s housing starts reflected a modest miss in starts and a modest gain in permits versus consensus expectations.

Of today’s economic releases two stand out; Weekly jobless Claims, EIA Petroleum Status Report.

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flickr photo: Moyan_Brenn