By Pete Biebel, Senior Vice PresidentPrint This Post
Following a thankless drubbing during the Thanksgiving Day holiday week, stocks ripped higher last week. The NASDAQ Composite (COMP) led the major indices with a gain of over 5 ½%. The Dow Jones Industrial Average (DJIA) and the S&P 500 Index (SPX) each had gains of 5% give or take. The sectors that had led the market higher through the first three-quarters of the year resurged to once again be at the head of the pack. The Technology, Healthcare and Consumer Discretionary sectors rang up gains of about 6% for the week. Rising out of the Black Friday lows, it was a non-stop rally week that considerably brightened the market’s dark mood.
The centerpiece of the mood-enhancing advance was smack dab in the middle of the week, immediately following the release of the FOMC’s policy statement. That statement and subsequent narrative from Chairman Powell hinted at a less aggressive plan for future rate hikes. Following those remarks, the rush to buy stocks and bonds made the Black Friday crowds look tame by comparison. The major averages racked up gains of 2% to 3% on that day alone. The rally in bonds pushed the yield on the Ten-Year Treasury Notes down to very near 3.0% for the first time since mid-September.
With this newly improved mood and with the approach of the December holidays, investors are hoping that the Santa Claus rally has begun. It won’t take much more of a push higher to nudge the averages beyond their November recovery highs. Clearing those levels would be a big step toward confirming that the correction phase has ended. It could be the gift that might keep on giving.
If there’s any bad news, it’s that last week’s moon-shot rebound displayed that same “rally through a vacuum” character that the early-November rebound revealed. It saw several all-day, wide-range rallies. In four of the five sessions, the averages ended near their highs of the day. It also saw relatively light volume on the big rally days. And, it left a couple gap-up openings in its wake.
Not so coincidentally, the centerpiece of the last month’s rally was also a big news inspired day. It was the Wednesday following Election Day. It was also the day that marked the high of the rebound. Both COMP and SPX vaulted above their 200-day moving averages that morning, but both sunk back below those levels a day or two later. Despite the magnitude of last week’s rally, neither of those indices has gotten back to their 200-days. SPX is just a whisker away, but COMP ended last week about 2 ½% below its long-term average.
Through the month of October, the markets were in a rather rare condition in which nearly every market was in the red for the month. Not just stocks, but commodities, currencies and fixed-income products were all down and most of those sectors had losses for the year. The reason that this is significant this time around is that it serves as a heads up to warn investors that the conventional defensive maneuvers are likely to be less effective in the current environment.
Shifting one’s allocation out of equities and into bond funds has been the standard defensive approach; it was a sensible approach as interest rates trended lower over the past several decades. It’s the de facto strategy of the so-called “target date” funds. That strategy has lost a degree of its dependability since rates began trending higher. The trend of higher interest rates has created a situation in which longer-dated bonds and high yield bonds may not be an efficient hedge for equities. Those sectors may now be positively correlated with stocks. More appropriate and more efficient diversifiers might be found in funds with shorter durations and/or exposure to floating rate securities.
But, does last week’s rebound mean that it’s time to be less defensive and be more aggressive? Will a Santa Claus rally be the beginning of a longer run to new highs? Or was that rally just another tease before the averages roll over and drop to lower lows? This next week or two could tell us a lot about the market’s potential to turn last week’s pop into a more lasting trend.
By the time this article is reviewed, massaged, approved and posted, we will have already seen the market’s initial reaction to the developments at last weekend’s G20 summit. Sunday evening, as I’m writing this, the U.S. stock index futures began trading by gapping up about 2% and they have maintained that gap for several hours. That would be a huge gap-up opening Monday morning. I am always suspicious of such insta-rallies. One key to watch today is how much of the opening gains the averages can hold onto into the end of the day. A spike up that immediately fails could be a sign of the end of the rebound rally. If the market can maintain or even extend those early gains, then the Santa rally may be underway. A 2% gain would put SPX right back at the levels of the November rebound high, around 2815. Sustained trading above that level would increase the odds that the correction phase has ended.
For anyone who felt like they had wished they’d been more defensive when the averages were probing their October and/or November lows, the next week or two will be important to watch. Regardless of whether the high in SPX over the next several days is 2815 or 2850, if/when SPX falls back below its 200-day moving average (currently 2762), that would likely be a good time to take defensive action.
At this time, I don’t yet know how Wednesday’s national day of mourning for former President George H.W. Bush might affect the economic releases that are scheduled for that day. Most likely, they’ll all be delayed by a day. Stock and bond markets will be closed on Wednesday.
|Monday 12/3/2018||PMI Manufacturing Index||55.7||55.4|
|ISM Manufacturing Index||57.7||57.2|
|Construction Spending, M/M||0.0%||0.4%|
|Tuesday 12/4/2018||Motor Vehicle Sales||17.5mm||17.2mm|
|Wednesday 12/5/2018||National Day of Mourning for Former President George H.W. Bush – Markets Closed|
|ADP Employment Report||+227K||+175K|
|Non-Farm Productivity, Q/Q, SAAR||+2.2%||+2.3%|
|Unit Labor Costs, Q/Q, SAAR||+1.2%||+1.1%|
|PMI Services Index||54.8||54.4|
|ISM Non-Manufacturing Index||60.3||59.0|
|Thursday 12/6/2018||Initial Jobless Claims||234K||225K|
|International Trade, Trade Balance||$-54.0B||$-54.9B|
|Factory Orders, M/M||+0.7%||-2.0%|
|Friday 12/7/2018||Non-Farm Payrolls||+250K||+190K|
Links to previously published commentaries can be found at benjaminfedwards.com/Company News/Blog/Market.