The momentum of our inaugural 2016 selloff may have climaxed yesterday. In a storm of red tickets and sell orders, the S&P 500 lost 2.37% or 47.17 points. The Dow industrials lost 2.32% or 392.49 points and the NASDAQ lost 3.03% or 146.34 points. Volume, excepting expiration days, rose to the highest level since mid September of last year climbing 18.04% on the NYSE and 19.42% on the NASDAQ.
You well know the reasons for the recent volatility as we have covered them to the point of exhaustion from the New Year’s Eve note through yesterday. Just a brief refresher:
Extreme volatility induced in part by:
OPEC’s decision to maintain production
Non-OPEC producers increasing production
Iran production entering the market
US crude approved for export
Resultant leg lower in crude
Global crude oil glut
North Korea’s “hydrogen bomb” test
Middle East ISIS-centric turmoil
Terrorism – globally
China’s devaluation of the yuan
Chinese regulatory prevarication on circuit breakers
China’s equity market meltdown
Concern over the impact of rising interest rates in the US, EM
Concern over Q4 corporate profits
Concern over the sustainability of US economic expansion
US dollar strength
The list of concerns that have fueled this brutal start of the year for US and global equity markets is admittedly quite long and equally as dire. That said, and despite numerous equity market gurus calling for a calamitous trading session in Asia as a result of the shedding of circuit breakers in Chinese markets in the overnight, Asian markets rallied from the opening bell. All three major Chinese equity indices logged impressive gains on the opening bell; CSI 300 + 2.9%, Shenzhen + 2.6% and the Shanghai + 2.5% and managed to hold on to gains heading into the weekend. In part, the reason for the rally was psychological. Without the back stop and certainty of predetermined and certain circuit breakers, there was no target for sellers to aim at and in the process attempt to build momentum for a trade lower. Additionally, the PBOC set the yuan unchanged from the previous session, in effect taking the currency trade that initiated a large part of the down draft off the table – for a day at least. The resultant stability in the yuan effectively gave boost to equities. Odds are good that if any rally materializes in Chinese equity markets over the next few trading sessions, it will be tested severely in short order.
The Bottom Line:
As of yesterday’s close at 1943.09, the S&P 500 is 9% below its 52-week closing high which set on July 17th. The Dow Industrials close at 16,514.10 and NASDAQ Composite close at 4689.43 are both 10% off their 52-week closing highs as well. The Dow’s 52-week high was set on May 15 and the NASDAQ’s, like the S&P 500, was set on July 17. On an intraday basis, the spread between 52-week intraday highs and lows is even more extreme. If you measure the spread between the 52-week highs and yesterday’s close, technically, we have entered “correction”. If you measure by the most recent highs established in November and December, all three majors are within 1% or 2% of what is considered a correction. No matter how you look at it, equity markets are off to there worst start in history.
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.
Yesterday’s Economic Calendar delivered some welcome news as outlined in the themes above.
On the Economic Calendar today the Employment Report due out at 8:30 AM EST will take top billing. Consensus is calling for a monthly non-farm payroll gain of 200k. Consensus ranges from 170k-249k. The unemployment rate is expected to remain at 5%. Private payrolls are expected to rise by 193k, the Participation Rate is expected to remain unchanged at 62.5%, Average Hourly Earnings are expected to tick higher by 0.2% and the Average Workweek is expected to remain unchanged at 34.5 hrs. Investors will be watching the top line and the official rate closely. If we receive a monthly gain of 200k or higher, investors will interpret that as a sign that our economy is currently positioned to withstand the geopolitical and economic storm surrounding us.