Due for a bounce this week? Many Variables at Play

Friday’s note was entitled:

“Markets will make an attempt to rally”

As per the concluding text from Friday’s note 1/8/16:

Given the strength posted by overseas markets in the overnight and given the fact that markets here in the US are oversold heading into the opening, a reflex rally will likely materialize today. Normally, Fridays are not the day of the week were buyers show up in force but given the extreme risk-off nature of our first four days of trading this year, bargain hunters may be enticed to step into the market. That event is even more likely if we see a move higher in crude today. A move in the 2% range in the early going may trigger some short term short covering and in the process take crude higher into the weekend. In the event that we see a reflex rally in equities, a move higher in crude and some encouraging economic data today, expect some relief from the onslaught.

My call for an attempt at a rally on Friday was predicated upon receiving mixed Asian equity market performances in the overnight, leadership/outperformance by Chinese markets, a solid Jobs Report and a tick higher in crude prices. Markets did in fact rally handsomely in the morning as all those factors did line up nicely and as a result there was some temporary respite from the onslaught of selling. Ultimately however, the morning rally faded as a result of a familiar theme – crude’s reversal lower ultimately closing off 11 cents a barrel. We saw markets come off midmorning highs and close at the lows of the session.

The Dow Industrials (-1.03%), S&P 500 (-1.09%) and NASDAQ (-0.98%) all logged losses on Friday capping off the worst start to a year for equity markets in history; Dow Industrials (-6.13%), S&P 500 (-5.91%) and Nasdaq (-7.24%). About the only saving grace on Friday was the contraction in volume we saw on the NYSE (-8.71%) and NASDAQ (-10.53%). Truthfully though, that is hardly comfort given the beating investors have taken at the hands of a painful selloff.

Friday’s Jobs Report was stunningly positive in that in the month of December, there were 292,000 non-farm payroll jobs added versus consensus expectations that were calling for 200,000. The previous two months were revised higher as well. The official unemployment rate remained at 5% – unchanged from November. The internals of the report were in line from Private Payrolls (275k), Participation Rate (62.6%), Average Hourly Earnings (0.0%) and Workweek (34.5hrs). The Baker-Hughes Rig count for the US dropped from 698 in the previous week to 664 last week. However Canada’s rig count more than doubled from 83 to 166 in the period – effectively offsetting the contraction in US production. Wholesale Trade came in at -0.3% for the month. Consensus was calling for a flat reading.

Today’s Economic Calendar is limited to the Labor Market Conditions Index to be released at 10:00 AM EST.

Over the weekend I received a number of emails, texts and calls from readers. In nearly every case, the tone was a mix of panic, concern, confusion and angst. I get it. Our first week of trading in 2016 certainty merits heightened concern but I think it important to remind you that I called for precisely this type of market action on October 14th, just a couple months ago. Though I suspected we would see a retest of August lows in Q4, it did not materialize until early January. See the video below.


Reuters Insider Video with Fred Katayama


Now, even though it appears as though we are in a free fall that will never end, it will. Again, earnings should offer some respite to the market. Financials begin reporting this week. Additionally, our economic data, though mixed, has confounded to the upside, notably Friday’s Employment Report. I expect crude oil to find some support above $30/bbl this week. Stability in Chinese markets are the variable but given the markdown we have seen and continue to see in the overnight, I suspect we are due for a bounce.

Fox Business : Update Markets Close Mixed ~ Earnings Season Begins

Kenny’s Commentary is available in your inbox before the opening bell. contact form

Flickr photo: Vintage ticker  Loodogs