Things you need to know ~
- Its been a tough year.
- The Grinch stole the Santa rally -investors doing lots of tax loss harvesting and re-allocating to sectors that they think will do better next year.
- The headlines are all negative, path of least resistance is lower
- Will covid strike again as a new surge in China is a big concern
- Try the Coquito –
The headlines keep coming and the algo’s keep sending wave after wave of sell orders to the market – because during this anxious time – the path of least resistance is lower….it’s always lower when its unclear…..
But what is really curious is that none of the headlines are about central bank policy, sticky inflation, collapsing home prices or rising rates….most of it is now a resurgence of a new strain of Covid 19 – coming from where? China (again)
“Covid Surge in China Prompts US to Require Travel Tests”
“Tesla Stock Suffers December Selloff Amid Demand Concerns, China Production Pause”
“European Stocks Fall as Covid 19 Angst Spreads”
And then we have these other assorted headlines –
“Wall St Bankers Brace for Big Pay Cuts, But Bosses Don’t Want Whining” (GS is cutting bonuses by 40% – trust me – Davey Solomon (CEO) will hear plenty of whining…. JPM, BAC, Jeffries and MS are believed to be cutting bonuses by 30% – and they’ll be plenty of whining there too!)
“How Southwest Melted Down” (LUV lost 5% yesterday)
“Crypto Customers Sell Claims at a Loss to Avoid Bankruptcy Wait”
“FTX Diverted $200 million of Customer Money for Two Venture Deals that Caught the SEC’s Attention” (When exactly did it catch their attention is the question – because it wasn’t’ before they collapsed at all)
And so what that says is that investors are exhausted and the algo’s don’t know what to do…it is not a statement that the buyers have gone away – quite the contrary – the buyers are alive and well, they just don’t need to be aggressive at all….the buyers are in control at the moment – because the sellers need the buyers to engage, but if the buyers see no reason to ‘take stock’ or just stand there to get run over then they are going to let the seller’s panic….and push prices lower….which is exactly what is happening….
By the time the closing bell rang on Wednesday – stock prices were lower….the Dow lost another 365 pts or 1.1%, the S&P gave up 46 pts or 1.2%, the Nasdaq lower by 140 pts or 1.3%, the Russell lost 28 pts or 1.6% and the Transports gave up 231 pts or 1.7% and all this reveals is that some investors are just exhausted….
Look –it’s the end of a long year, stocks have suffered and the news has not been ‘good’ and so why would you expect buyers to be aggressive? On top of all the negative headlines concerning a range of issues – we are still dealing with weakening US macro data, an aggressive FED and equally aggressive European central banks. We have rising interest rates and that does two things – they put pressure on stocks (the sexy high growth ones get hurt the worst – Nasdaq down 35% ytd) while offering investors an alternative to stocks – 3 month T bills are now yielding 4.3% and offer zero risk while keeping you completely liquid, 2 yr. treasuries are now yielding 4.35% but hold you up for a bit longer….but it’s all better than losing money in the market – if you don’t have the time or stamina to take advantage of what will surely be a longer term ‘buying opportunity’.
Buyers in the market now are saying that they don’t know where the bottom is, but are happy to ‘feather’ in new money ( we call that DCA – Dollar Cost Averaging)….taking advantage of the sale going on –in good, high quality, mega cap, multinational names…Now, don’t get me wrong – there is a sale going on in the other names as well…you just need to decide which names or sectors you want to be in.
Calls for the S&P to test 3000 (Goldman and Morgan Stanley) before this is over represents an 18% decline from HERE…. 4th qtr. earnings revisions (lower) are now a daily occurrence – ahead of the start of earnings season just 2 weeks away. S&P 2023 year-end earnings per share are also getting slashed from what was expected to be $230/sh ish – to anywhere between $180/$200/share for 2023. None of this is new by the way….this has been the narrative for months, so for anyone to point to these arguments as the reason for the weakness is missing the boat.
The fear now is that this narrative is wrong – leaving investors to shuffle the deck, selling the losers (of which there are many) and repositioning themselves for the new year. Just to be clear, I am in the camp that we could test the October low of 3470 – which represents another 8% move lower from here IF the tone doesn’t change at all. Now if we get a renewed surge of covid (a black swan type of event) then all bets are off…….and we will have to re-examine…
But let’s not kid ourselves – it is ugly out there right now- but there are some sectors that are holding up….……Every sector was lower yesterday with Energy leading the way – XLE down 2.2% – but still up 55% ytd on those renewed covid fears and what it could do to energy demand, Tech – XLK lost 1.6% leaving that sector down 31% ytd, Real Estate – XLRE lost 1.6% – off 30% ytd, Communications – XLC down 1.5% leaving it off 40% ytd, Basic Materials – XLB down 1.5% leaving it off 15%, Industrials – XLI down 1.3% off 8% ytd, Consumer Staples down 1.2% only off 3% ytd, Consumer Discretionary lost 0.9% but it is off 39% ytd, Healthcare gave up 0.6% leaving it down 4% ytd, Financials off 0.4% leaving them down 14% ytd while Utilities lost 1% leaving them down just 1.2% ytd.
Buyers in the market now are saying that they don’t know where the bottom is, but are happy to ‘feather’ in new money ( we call that DCA – Dollar Cost Averaging)….taking advantage of the sale going on –in good, high quality, mega cap, multinational names…Now, don’t get me wrong – there is a sale going on in the other names as well…you just need to decide which names or sectors you want to be in.
Calls for the S&P to test 3000 (Goldman and Morgan Stanley) before this is over represents an 18% decline from HERE…. 4th qtr. earnings revisions (lower) are now a daily occurrence – ahead of the start of earnings season just 2 weeks away. S&P 2023 year-end earnings per share are also getting slashed from what was expected to be $230/sh ish – to anywhere between $180/$200/share for 2023. None of this is new by the way….this has been the narrative for months, so for anyone to point to these arguments as the reason for the weakness is missing the boat.
The fear now is that this narrative is wrong – leaving investors to shuffle the deck, selling the losers (of which there are many) and repositioning themselves for the new year. Just to be clear, I am in the camp that we could test the October low of 3470 – which represents another 8% move lower from here IF the tone doesn’t change at all. Now if we get a renewed surge of covid (a black swan type of event) then all bets are off…….and we will have to re-examine…
But let’s not kid ourselves – it is ugly out there right now– but there are some sectors that are holding up….……Every sector was lower yesterday with Energy leading the way – XLE down 2.2% – but still up 55% ytd on those renewed covid fears and what it could do to energy demand, Tech – XLK lost 1.6% leaving that sector down 31% ytd, Real Estate – XLRE lost 1.6% – off 30% ytd, Communications – XLC down 1.5% leaving it off 40% ytd, Basic Materials – XLB down 1.5% leaving it off 15%, Industrials – XLI down 1.3% off 8% ytd, Consumer Staples down 1.2% only off 3% ytd, Consumer Discretionary lost 0.9% but it is off 39% ytd, Healthcare gave up 0.6% leaving it down 4% ytd, Financials off 0.4% leaving them down 14% ytd while Utilities lost 1% leaving them down just 1.2% ytd.
Housing XHB is down15% ytd, Retail – XRT down 35% ytd, Semis’ – SOXX down 38% ytd, Metals and Mining XME while off 4% yesterday remain up on the year at +10%. Aerospace and Defense was down 0.7% but remains up 8.5% ytd. The Value trade – SPYV off 8% ytd while the Growth trade – SPYG is down 32% ytd.
On the contra side – it is a different story – the basic retail hedges are all up – DOG +1.1% (6% ytd), the SH up 1.2% ( up 20% ytd) and the PSQ gained 1.4% leaving it up 40% ytd.
Treasury yields are on the rise and remain inverted…..and getting more so…..Oil which traded back up to $80 ahead of the severe winter weather we had is now trading back at $77.50 on those renewed covid fears and what it will do to demand. Gold is trading at $1812/oz – just holding onto the trendline as it continues to churn between $1750/$1820.
This morning – US futures are churning higher as we enter the final two trading days of the year….…..The Dow up 44 pts, the S&P up 12, the Nasdaq up 65 and the Russell adding 6 pts. There is not eco data to speak of that will do anything to determine the path of stocks today….All of the action will be driven by year end tax loss selling and investors looking to take advantage of good quality names ahead of the new year.
And here’s a thought – unlike stocks that you sell to take advantage of the loss and which you can’t replace for 30 days without negating the sale – crypto’s do not fall under that rule…..because they are not securities….so you can make a sale this morning – take the loss and immediately turn around and buy the position again – to maintain your exposure. Now, I’m not telling you to do that, I am just telling you the facts.
European markets are all higher as well….not big, but higher – all up about 0.4% across the board…. As we enter the final trading days of the year.
The S&P closed the day at 3783 – down 46 pts – after testing as low as 3780. I kind of feels like it wants to hold here and attempt to rally in the final two days of the year…- but no matter what the rally is – it isn’t going to save the day at all…Just sayin….. I guess this year it was the Grinch who stole Christmas!
Take good care,
Chief Market Strategist
kpolcari@slatestone.com
Coquito – “little coconut” – A traditional Puerto Rican Christmas/New Years drink. It’s kind of like egg nog, without the eggs.
This is a great drink to serve to your guests on New Year’s eve when the ball drops….
For this you need – Dark Rum – Flor de Cana works great, 1 can of cream of coconut (coco lopez), 1 – 12 oz can of evaporated milk, 1 – 14 oz can of condensed milk, 1 ½ tsp of vanilla extract, and 1 cinnamon stick.
In a blender – add 1 ½ c of the rum, ( you can taste and always add more if you want), the cream of coconut, evaporated and condensed milks. Add in the vanilla and blend at high speed. Then toss in the cinnamon stick (do not blend) and refrigerate for at least on hour….When serving – shake well and serve in a cold glass….mmmm – so good.
Enjoy
