The market tried to follow through on the upside yesterday after Friday’s terrific upside rally resulted in the major indices breaking their four-week losing streak.
And it sure looked like the good times were going to continue as by the middle of the day, the Dow had made a gain of 305 points, the S&P was ahead by even more at 55 points up while the Nasdaq was doing the best of all with a 238 point advance.
The only problem was that the VIX was not buying it, as why would it be a little higher on such a gain?
Then sure enough, in the early afternoon things began to weaken, and contrary to the usual pattern over the past year, the Dow was the one that broke down first and even had the nerve to go negative at 3pm as AMGN, BA, CAT, JNJ and TRV all broke down big-time and as a result, it turned that 305 point advance into a closing decline of 113 down to 33,517.
The S&P followed along but not to the extent of the Dow’s declines as that 55 point gain ended in a closing loss of 3 down to 3842 which was also a real disappointment because of the extent of the early gain, but at least the stronger Nasdaq due to some strength in the beaten-down former technology leaders kept the negatives to a minimum.
And as mentioned above, in a reversal of the usual pattern of the past year, the Nasdaq did end positive with a 66 point advance up to 10,635 as beaten-down TSLA finally showed some independent strength on its own as did MSFT. But the fact that it was not able to hold the early best advance was also a sign of shakiness.
So what caused a terrific start to end in such a dud, and the answer is that some statements from Fed governors turned out to be really negative after the market had built in the expectations after the lower wage gains in last Friday’s jobs report and the softer December ISM Services report had given hope that perhaps the Fed would not be so aggressive in their ongoing rate increases. This was evident in the sharp decline in bond yields on Friday due to the potential for this situation to materialize.
But statements from San Francisco Fed President Mary Daly, who said during a live-streamed interview with the Wall Street Journal that she expects policymakers will raise interest rates to somewhere above 5%, and this helped to reverse what had been that terrific early upside pattern. She then added that the final rate will ultimately depend on the path of inflation.
Echoing that view, Atlanta Federal Reserve President Raphael Bostic also said the U.S. central bank should raise interest rates above 5% by early in the second quarter and then hold them there for a “long time.”
“I am not a pivot guy,” Bostic said in remarks and added that “I think we should pause and hold there, and let the policy work.”
These two comments put the final kibosh on the market rally and today the market is bouncing around in both directions in what appears to be a volatile and choppy day as we await the very important December C.P.I. report on Thursday.
The report is projected to show a gain of 6.5%, down from November’s 7.1% and hopefully this might convince the Fed and the market that inflation is on its way down and that the Fed will not be so aggressive as the two above-referenced speakers indicated yesterday.
Earnings this week will see: yesterday – LULU, M lower and ANF higher; today – BBBY, of all things, higher ; Friday – a host of large bank earnings such as: Dow components JPM and UNH plus BAC, BLK, C, DAL, BNY and WFC.
Economic reports will have: today – December small business optimism index fell to a 6-month low at 89,8 which marked the 12th straight month below the 49-year average of 98; Thursday – weekly jobless claims and the all-important December C.P.I.
Donald M. Selkin
Chief Market Strategist
Don Selkin is the Chief Market Strategist at Newbridge Securities Corporation, member FINRA/SIPC and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our current or potential customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analysis concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author. These news sources include the following: {Bloomberg Financial, Reuters, and Associated Press}. It is possible that at any given point in time, the author, Newbridge Securities, or one or more of its employees or registered individuals associated with Newbridge Securities, may hold a position, either long, or short, as well as options, bonds or other instruments in the companies mentioned in this report.