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There have been several signs that we may have been settling into support and ready to bounce since the big intraday dip on January 20th. Today's price action appeared to be the follow through we were expecting. But remember that markets tend to come back and test the lows before truly heading higher, so be cautious. SPX had a huge 47 point day, closing at $1940. RUT followed the lead with a gain of $32 to close at $1035. Volatility contracted with the VIX losing over two points to 20.1%. There was probably a lot of short covering and trading volume bounced higher with 3.8 billion shares of the S&P 500 stocks trading today. Trading on the NYSE increased 16% and trading on NASDAQ rose 13%.
The first estimate of fourth quarter GDP was reported this morning at +0.7%, resulting in a full year gain of 1.7% - tepid, but far from a recessionary value. Analysts pointed to the Bank of Japan's negative interest rates for starting this rally, but the market action was somewhat muted this morning and accelerated as the day wore on. About half of today's increase came after noon.
I took the opportunity to add to my March put spreads on SPX, but I would still recommend caution. The price action of the past few days has pushed SPX above the middle of the Bollinger bands. You wouldn't know it from all of the negative commentary, but the markets have recovered quite a bit.
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I think I liked the old Greenspan days better when the market was basically left to figure out things on its own. Bernanke and now Yellen are trying to be more transparent, and market analysts are behaving like spoiled children wanting more candy. This morning, oil prices rose, and the markets followed suit. After studying the FOMC announcement, the market decided the door was left open to further rate hikes and the tantrums began. SPX lost $21 to close at $1883 and RUT closed down $15 to $1003. That leaves both indexes close to the support level that has appeared to be developing over the past few trading sessions. Volatility rose about six tenths of a point to 23% - moderately high, but not too high.
Trading volume rose with 3.1 billion shares of the S&P 500 stocks trading. Volume rose 10% on the NYSE and rose 12% on NASDAQ.
New home sales increased to an annualized rate of 544k for December.
The Fed announcement left interest rates unchanged, and said future rate hikes would be small and would depend on the data (same old story). New language spoke to market volatility and global economic conditions and said the FOMC will be monitoring those issues closely - duh. It should be obvious that the urban legend circulating about four rate hikes in 2016 is toast given market conditions since the first of the year plus some mediocre economic numbers on top as dressing. But the Fed didn't explicitly make any promises and the market didn't like that. We'll see if that mood continues tomorrow. Maybe a good night's sleep will help.
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I have wondered when the rigid linkage between oil prices and the U.S. stock market would weaken, but it isn't happening yet. The contraction of China's economy is certainly a major factor in a decline in demand for oil, but one can't ignore the flooding of oil supplies in the markets by OPEC, Iran, and ISIS. The conventional wisdom appears to assume the U.S. economy is either in or about to enter another recession. The economic data don't support that conclusion.
So oil prices dropped Friday, and the stock markets rose. Today, they gave back those gains as oil prices fell. SPX closed down $30 at $1877 and RUT fell $23 to $997. Volatility rose almost two points with the VIX closing at 24.2%.
Trading volume continued to decline with 2.8 billion shares of the S&P 500 stocks trading. Trading volume on the NYSE dropped 15% and volume declined 11% on NASDAQ.
No significant economic data were released today. The FOMC meeting begins tomorrow and will end with an announcement on Wednesday. Hopefully, that announcement will put to bed this continued drum beat of four interest rate increases coming this year. The most significant economic data will be released Friday with the first estimate of fourth quarter GDP growth and the Chicago PMI.
We remain on the edge of our seats, wondering if we have seen the lows of this correction. From a technical standpoint, giving back Friday's gains is not a good sign. But it is normal to have a lot of choppy sideways trading for several sessions following the low. Take a look at the charts after the August flash crash. It took over a month to "get over" that correction and feel confident the markets were back on track.
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Oil prices rose today on rumors that OPEC may be near the point of reducing oil production, and stock market prices rose with the oil prices. Let me recap: we were told a few months ago that lower oil prices were forecasting reduced economic activity (reduced oil demand) and the risk of a global recession. But today, the markets traded higher on the back of higher oil prices on the basis that OPEC might reduce the oil glut on the market - what about declining oil demand signaling declining economic output and recession? This is one more illustration that the markets often move in irrational ways, or, at least, that the market analysts don't have explanations that appear to hold water.
SPX gained $27 to close at $1904 and RUT closed up $21 at $1018. The VIX pulled back by 1.6 points to 22.6%. Trading volume was close to flat on the day with 2.7 billion shares of the S&P 500 trading (almost back to the 50 dma). Trading volume declined 1% on the NYSE, but rose 3% on NASDAQ.
The Case Schiller housing price survey came in at an annualized +5.8% for November, up from October's 5.5%. The Conference Board's consumer sentiment survey reported 98.1 for January, up from the previous month's 96.3.
Tomorrow brings the FOMC announcement and I am sure the market will be parsing every word, but who knows what strange interpretation may move the market? My cynicism is showing...
The largest potential market mover comes on Friday with the 4th quarter GDP report. After all of the recent hand wringing about global recession, that report will be pivotal.
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I hesitate to suggest we have finally seen a bottom to the market ugliness this year, but many signs suggest just that. SPX gained $38 to close at $1907 and RUT gained $23 to close at $1021. That was a 2.3% gain for RUT as compared to 2.0% for SPX; that may seem insignificant, but RUT has rarely outperformed SPX, not only this year, but throughout most of 2015. SPX gapped open higher at the open and remained pretty steady throughout the day. Trading volume dropped off with 3.2 billion shares of the S&P 500 stocks trading. Trading volume was down 4% on the NYSE and down 14% on NASDAQ.
The large lower shadows on the SPX and RUT candlesticks Wednesday was a strong signal, but yesterday brought a weak follow through. Today's close on SPX is well above the August flash crash lows, but much more damage was done to RUT. The small cal index remains below even the October 2014 correction low.
The elephant in the room is the price of oil. Oil traded up today and I think that was the principal confidence builder for the bulls. I believe that relationship is over done, but ignore it at your peril. Others pointed to the report of existing home sales for December, coming in at 5.76 million, a large increase over November's 4.76 million.
The big question is whether this market continues higher next week. We have a Fed meeting next week - good or bad? This market is impossible to predict with any certainty. But many are trying...
