Role Reversal

US equity markets, in concert with global markets, followed through on the hint of a reversal higher as framed by last week’s pause in our dramatic trade lower. All three majors registered meaningful gains on Friday and in the process allowed investors to take a cleansing breath heading into the weekend. The NASDAQ led the way gaining 2.7%, followed by the S&P 500 (+2.0%) and Dow Industrials (+1.4%). A critical element missing from both Thursday and Friday’s constructive trade was volume. Volume on the NYSE (-3.89%) and NASDAQ (-11.01%) slipped both days. The falloff in volume on both major exchanges wasn’t dramatic but given the gains on Friday it is noteworthy and does leave investors with a tinge of doubt.

US economic data provided some girth to the lift on Friday. Existing Home Sales – Level – SAAR came in at 5.460M for December versus expectations of 5.200M. The month-over-month (+14.7%) and year-over-year (+7.7%) figures were equally as impressive. The PMI Manufacturing Index Flash was 52.7 versus 51.0 for the month. Even the Chicago Fed National Activity Index was less dire than anticipated coming at -0.22 versus -0.36. Leading Economic Indicators missed fractionally at -0.2% versus -0.1%. In something of a statistical fluke, the Baker-Hughes North American Rig Count was unchanged from the previous week at 887. The US rig count dropped as Canadian counts rose.

Though I have been cautious on the markets since the beginning of the year, as you know, I have also repeatedly called for Q4 earnings and economic data to provide some ballast to offset the risk off trade that has dominated our trade thus far in 2016.This week will be a test of that thesis.

As discussed in Reuters, this week investors will be provided with a welcome shift in focus. Earnings will take prominence as 130 of the S&P 500 report Q4 results. Included in this week’s earnings schedule are the likes of AMZN, MSFT, FB and APPL. Additionally, this week is both Fed and economic data-centric. The FOMC meeting is set to begin on Tuesday and the Economic Calendar is dense with data.

There is a distinct possibility that a dovish tone from the Fed this Wednesday may act to support the markets fragile state of affairs as well.