Stock Indexes Nearing Major Support
The Major Stock Indexes are, once again, approaching their 2018 lows and key support. The markets have successfully bounced off these levels 8 separate times. A ninth bounce of substance is looking increasing improbable.
Economic and market conditions are rapidly deteriorating. The plunge in Crude Oil prices and Treasury Rates provided strong hints that the economic environment is less than meets the eye.
Most stocks appear to have begun their initial BEAR phases. The Major indexes however, have somehow managed to disguise the extent of the damage, leading many to view the last 2 months as merely a “Correction”. That conclusion is increasingly unlikely.
The Slide Show below covers the Dow Jones Industrial Average (Dow), S & P 500 (SPX), Nasdaq 100 (NDX) and Russell 2000 (RUT). Some key takeaways from the charts are as follows:
- All 4 Indexes are forming Topping “Reversal Patterns”. The Dow and SPX are barely within the lower bounds of their Ascending Trend Channels. The NDX and RUT have make “Dome” or “Rounded” Tops.
- Each Index is susceptible to a severe and violent decline. A “Waterfall Decline” is more than a remote possibility in light of dizzying volatility and systemic illiquidity. The large capitalization indexes have exposure of a further 20-25% loss.
- While the “Support” levels are inexact, RUT has broken slightly below its key level of 1450. RUT has, thus far, led the other indexes in reaching lower values during this recent period. We may be seeing that again.
Economically Sensitive Sectors Propelling the Downside
Yesterday, we discussed the deteriorating conditions for Banks and other financials: “Collapsing Financials Lead Stock Markets Lower” (https://markonomics101.com/2018/12/08/collapsing-financials-lead-stock-markets-lower/).
The importance of the Financial Sector can NOT be understated. Out of the top 25 companies ranked by Market Capitalization, 6 are Financials (http://www.iweblists.com/us/commerce/MarketCapitalization.html).
JP Morgan Chase (JPM), Bank of America (BAC), Well Fargo (WFC) and Citigroup (C) have a combined market capitalization of nearly $1 Trillion. If Visa (V) and MasterCard (MA) are included, the top 6 financials are worth nearly $1.5 Trillion.
Bull and Bear Markets are often the result of shifts in Federal Reserve Monetary Policy. These policies target the Economy overall, but Financial Institutions’ operating performance is particularly sensitive to them.
Almost all sectors are now either firmly in downtrends or topping. Industry groups that are most economically sensitive are providing plenty of corroborating evidence that a Recession is imminent, if it has not already started.
The Slide Show below shows the price performance of the most economically sensitive industry sectors. These include Homebuilders (XBH), Semiconductors (SOX), Oil Drillers (OSX), Retail (XRT) and Industrials (XLI).
The Energy Sector is also not only very large but economically sensitive. While the Slider above showed only Drillers, the Sector includes the large, multinationals and literally hundreds of smaller producers. .
Retailers Walmart (WMT) and Amazon (AMZN) make up 2 of the top 11 largest companies. Annual retail sales were $5.7 Trillion in 2017 according to the Census Bureau. A full 20% of those sales occur during Holiday Season (https://www.thebalance.com/u-s-retail-sales-statistics-and-trends-3305717). Is the Retail Sector ETF (XRT) signaling a disappointing Christmas?
Homebuilder stocks are reflecting the sluggish activity in housing starts. From the data supplied by the Census, housing starts appeared to have topped about 6 months ago. If so, this cycle crested at the LOWEST PEAK level since at least 1960.
Real Estate is One of the Few Bright Spots
Lower interest rates benefit Real Estate Investment Trusts (REITs). As rates go down, so do costs for REITs and properties have historically appreciated and have been excellent hedges of inflation (https://www.zacks.com/stock/news/341932/real-estate-etfs-at-onemonth-high-heres-why?cid=CS-MKTWTCH-HL-341932).
The Real Estate Sector Fund (XLRE) yields about 3.4% and has assets of $2.7 Billion. The entire REIT sector, is fairly small, and thus, not very impactful as to the direction of the market.
Will The Fed Raise Rates in December?
Two weeks ago investors, placed a 100% probability on a 0.25% rate hike in December. Now, odds are closer to 70%. The December interest rate decision presents a substantial dilemma for the Federal Reserve.
On the one hand, failure to hike rates in December will send the strongest possible message that the Economy is VERY WEAK. Even if rates are raised in December, Fed Funds will still be a historically low 2.25-2.5%.
On the other hand, if the Fed DOES hike, it may CAUSE the Yield Curve to invert. Ten year Treasury Yields exceed those of 2 year bonds by a slim 10 basis points. Intentionally inverting the curve might very well be career suicide for Chairman Powell. Rates can always be raised at the next meeting.
Either way, the news goes with the trend. What matters is not what the Federal Reserve does, but how the markets react. Investors are best served reducing exposure in this period of ultra-high risk and volatility.
Be Informed, Not Misled.