Things you need to know.

–        The S&P enters the ‘correction zone’ leaving only the Dow in the ‘normal zone.’

–        The Middle East conflict did not go into overdrive – oil lower, gold steady and stock futures point higher.

–        Treasuries continue to churn – but the path of least resistance is higher for yields.

–        Try the Quick and Easy Spaghetti and Meatballs

And it got ugly again on Friday as the day came to a close and the weekend came upon us…..some of the weakness a direct result of the uncertainty that the weekend brings concerning the middle east conflict and some of it is due to the ongoing ‘correction’ that is now engulfing all of the indexes and some of it due to the ongoing uncertainty taking place in DC – now that there is a NEW House Speaker…..…..The S&P is the latest index to ‘give it up’….now down more than 10% off the July high, joining the Nasdaq – down 12.5%, the Russell and the Transports both down 18+% – as they get ready to ‘kiss’ BEAR market territory…the only index not in correction territory is the DOW – only off 8% from the summer high.    

Gold tested and pierced $2000/oz trading up to $2019/oz before ending the day at $1,998 – the recent surge higher can be directly tied to the Middle East outbreak…. surging nearly 10% in the last 3 weeks as the ultimate safety trade. I like Gold and still think we will see higher prices in the weeks ahead – think $2100…which is a 5% advance from here.

The dollar index is holding tight at $106.45.  

Oil ended the day higher – closing at $85.50/barrel – as the week came to a close and the angst rose across the middle-east ahead of the weekend.  This morning oil is down $1.50 at $84.10 after speculation builds that the conflict will remain contained – even as Iran suggests otherwise…. The issue now is what will Syria, Lebanon and even Turkey do should the Israeli’s move deeper into Gaza? Which then leads to the next question – What will we do? What will China do?  What will Russia do?

Treasury yields continue to be erratic from one day to the next as they try to find economic stability…. On Friday they ticked slightly lower on the back of the economic data that left many wondering what’s next.  Stronger Personal Spending, a confused PCE read and an uptick in 1 yr. and 5 – 10 yr. inflation expectations – all causing renewed angst for investors.  Friday afternoon left the 2 yr. yielding 5%, the 10 yr. 4.838%, and the 30 yr. at 5.017%.  Look- the US bond market has come under intense pressure and volatility amid the expectation of higher rates, along with the idea that the FED will have to bring an enormous amount of bonds to the market to pay the bills caused by the reckless spending by the current administration…..…So, go back to Econ 101….more supply means lower prices and higher yields….. I still think that bonds are going lower in the months ahead before they stabilize….so prepare yourself for higher rates.  Wednesday’s Treasury Dept bond sales announcement is potentially even a bigger weekly event than the FOMC meeting…. Why?  Because it will reveal what the Treasury will need to sell in order to continue to fund the massive budget deficit.

This morning’s yields are all teasing just a bit higher ahead of a big week that includes nearly 75 company reports along with a range of macro data points.  We’ll hear from AAPL, MCD, SPG, RIG, CAT, AMGN, PFE, AMD, HUM, CVS, QCOM, PYPL, LLY and many more….

On the economic front  – we are going to get ADP employment – expected to be +150k new jobs, Housing price data, Manufacturing & Services PMI’s (both expected to move into expansionary territory – NOT something the FED wants to see), Construction Spending, the FOMC rate decision (pause), Labor costs, Factory Orders, Durable Goods and Friday’s key data point – the October NFP report – which is expected to show a gain of 190k new jobs…The unemployment rate is expected to remain at 3.8%, Avg Hourly Earnings m/m of +0.3% and y/y of 4%.

The VIX – fear index – ticked higher +3% – as fears resurfaced on news that the Israeli Defense Forces were expanding their move into Gaza, while Hezbollah and the Houthi’s threaten further action – all supported by Iran… The VIXY etf – rising 3.25%, the SH +0.5% and the DOG rose by 1.15%.  The PSQ in fact fell by 0.5% as the Nasdaq bucked the trend rising by 47 pts on Friday.

This morning – US futures are ticking higher after the weekend did NOT see an all-out invasion of Gaza – in fact – the Israeli’s are proceeding more cautiously – allowing even more humanitarian aid into the region.  Now instead of that promised massive ground invasion – Israel has opted to go more slowly to avoid even larger civilian casualties even as the goal is to destroy Gaza to ensure that Hamas has nothing left….which doesn’t mean they will eliminate it, they won’t and this conflict will only embolden the Iranians, the Syrians and a host of other Arab nations. What is amazing to me is that more than 1 million Gazan’s have been displaced – yet not one Arab nation is opening its doors. One because they don’t want the problem and two – because they don’t want the problem.

At 6 am – Dow futures are up 150 pts, S&P’s up 25, the Nasdaq up 115 and the Russell is up 15.  Now some of that is a direct result of a short term ‘oversold’ condition…. with buyers scanning the landscape for opportunities in names that have become dislocated for no other reason than large asset managers using them as ATM’s. Think the magnificent 7…. AAPL, AMZN, NVDA, META, TSLA, MSFT & GOOG.

From a sector perspective – we have also seen money come out of the Consumer Discretionary sector over the past 6 weeks….leaving that sector up only 16% – down from 34% – (that’s an 18% decline) which should surprise no one….especially if you are in the camp that thinks it’s only gonna get harder in the months ahead. In addition, we continue to see weakness in Utilities – XLU -1.9% leaving it down 16% ytd as investors in that sector expect higher rates ahead.  Many investors buy Utilities because they are boring (and defensive) and offered decent dividend yields…. but higher treasury yields, money market & CD rates make utility dividends less attractive – thus the pressure.  We also saw big declines in Healthcare – XLV – 1.7%, Financials – XLF -1.8%, Consumer Staples – XLP – 1.4%, while Energy – XLE gave up 2.4%.

There is now more than $6 trillion in money market funds – as some investors are selling stocks and putting money aside.  5% guaranteed is very attractive in a very uncertain environment – but remember – it also suggests future demand for stocks when investors feel less anxious…..….as does total short interest in the markets – remember – investors who short stocks EXPECT them to go lower – but at some point – they must buy back those stocks to close out the position – and that short interest actually reflects future demand as well….So rising short interest can actually be a ‘contra indicator’ and short interest IS rising. 

Stocks in Europe are higher this morning…. – markets across the region are up more than 0.6%.  The move being credited to the lack of that massive ground invasion…. The BoE is due out with their latest policy statement on Thursday and the week will be full of European company earnings.    

In any event the S&P closed down 20 pts or 0.5% on Friday – leaving it at 4117 – now down 10.75% off the July high….The long term trendline at 4240 now represents resistance for the S&P – a quick rally back to that level would not be out of the question….but expect it to find plenty of resistance…..A look at the chart now suggests that a test lower – think 3950 ish – is not out of the question leaving some to ask Will we have a Santa Claus rally? My sense is that we could, just not the rally many thought it might be.  Which just means – be prepared, don’t be surprised, remain short term cautious while at the same time remaining long term optimistic…. keep building up your cash position which is paying you 5+%.  I would not be selling ‘good stocks’ I would though hedge your portfolio with some of the contra trades…. VIXY, SH, PSQ & DOG if you are super concerned.

Now in any event – it’s the economy that will make a difference in the long term…. – the full impact of the 11 rate hikes by the Fed along with rates hikes by other central banks around the world have yet to be completely felt – and even if we pause (which we are), JJ has made it clear that those rates will remain higher for longer and that has the potential to remain a headwind for stocks for months to come. 

Take good care.

kpolcari@slatestone.com

Sources:  Bloomberg, CNBC, Reuters, Wall Street Journal

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The market commentary is the opinion of the author and is based on decades of industry and market experience; however, no guarantee is made or implied with respect to these opinions, which may not necessarily align with our firm’s standpoint.

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Kenny Polcari is the Chief Market Strategist for SlateStone Wealth.  Neither Kenny nor the partners of SlateStone Wealth are compensated in any manner by the issuers of any securities mentioned in the publication.

Quick and Simple Spaghetti and Meatballs.

You can do this all in about 1 hr….simple, quick and so good.

You will need – Leeks, 1 can of kitchen ready crushed tomatoes, s&p, olive oil, Fresh grated Parmegiana

For the meatballs you need:  1 ½ lbs. of ground chuck (80/20), 1 egg (beaten), Italian Bread slices – chopped and soaked in whole milk, 3 grated garlic cloves, Parmegiana cheese, chopped parsley, s&p.  ½ lb. of spaghetti.

Bring a pot of salted water to a rolling boil on the back burner. 

Begin by making the meatball.  Mix all of the ingredients – squeeze the milk out of the bread, and then form into golf ball sized meatballs.  Brown them in a frying pan and then remove. 

Using that same pan – do not clean it.  Add the sliced/chopped leeks (use the white into the light green part of the stalk). Saute until soft.  Now add the can of tomatoes, s&p and half a can of water.  Bring to a boil and then reduce to low.  Add back the meatballs and let simmer for 20 mins.

Add the spaghetti to the water and cook for 8 mins. or so…leaving it just a bit aldente.  While this is cooking – remove the meatballs from the sauce – set aside.

Using tongs – take the spaghetti out of the water and into the sauté pan with the sauce.  Toss to coat and add in one handful of fresh grated cheese – toss again.  Serve in warmed bowls – top with one or two meatballs.  Done….and so good.

Buon Appetito