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Trader’s Outlook for December 7, 2018: Rough week for the bulls

Weekly Market Review:

U.S. equity markets are relatively quiet early Friday morning relative to the volatility that was experienced earlier this week. To give you an idea of just how volatile this week was, the S&P 500 traded in a 178.65 point range (or 6.47%) over the past three days (reminder: markets were closed on Wednesday to honor the late President George H.W. Bush). The primary driver behind this week’s volatility was the on-going trade dispute between the U.S. and China.

Markets rallied over 1% on Monday after the Trump administration said that China agreed to remove tariffs on cars coming in from the U.S. and that both countries had agreed to a 90-day trade truce, but then reversed course on Tuesday after The People’s Daily (the official newspaper of the Chinese Communist Party) failed to confirm either of these developments. The trade tension between the two countries was further heightened by news that CFO Meng Wanzhou of Chinese tech-giant Huawei had been arrested in Canada at the request of the U.S. government in regards to an investigation of whether Huawei violated American sanctions on Iran.

The other volatility driver was a 2-year/5-year Treasury note yield inversion, which has historically been a prelude to economic recessions. While the 2-year/5-year yield isn’t a very common comparison, the spread between the more commonly-monitored 2-year/10-year narrowed to 11 basis points on Tuesday, which represents the lowest levels since 2007. While the S&P had an impressive intraday reversal on Friday, the index is still down over 2% on the week as of early Friday morning:

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Probability of Fed Rate Hike (12/7/18):

This week’s market volatility, heightened trade uncertainty and yield curve inversion is likely going to influence the Federal Reserve’s rate hike trajectory. As of mid-Friday morning the probability of a December rate hike is 72%, which is down 6 ticks from last Friday’s 78%, but yesterday morning I saw the probability get as low as 60% before markets recovered in the second half of the day.  I’ve heard that 60% generally represents the “line in the sand” as to whether the Fed will move forward with a hike or not, so we’ll need to keep an eye on this as we approach the Dec. 17th-18th FOMC meeting which is roughly a week and a half away.

Current Probabilities:

Source: Used with permission of Bloomberg Finance L.P.

This Week’s Notable 52-week Highs:

Abbott Laboratories Inc. (ABT - $1.79 to $69.77)

Advanced Auto Parts Inc. (AAP - $3.08 to $172.68)

Anthem Inc. (ANTM - $5.90 to $281.51)

Atrion Corp. (ATRI + $8.85 to $785.48)

Crown Castle International Corp. (CCI - $1.07 to $116.40)

Ely Lilly and Company (LLY - $2.41 to $113.43)

Entergy Corp. (ETR + $0.55 to $88.80)

Etsy Inc. (ETSY - $0.97 to $54.53)

Exelon Corp. (EXC + $0.06 to $46.96)

Ingersoll-Rand PLC (IR - $1.89 to $99.32)

NRG Inc. (NRG + $0.52 to $41.08)

Pfizer Inc. (PFE - $0.85 to $44.13)

Sun Communities Inc. (SUI - $0.84 to $107.48)

Tribune Media Corp. (TRCO + $0.05 to $45.00)

UGI Corp. (UGI + $0.43 to $58.99)

Workday Inc. (WDAY - $6.35 to $161.77)

Q3 Earnings Season

Nearly all of the S&P 500 companies have reported Q3 earnings and for the quarter roughly 60% beat on the top line while 83% beat on the bottom line (both are below last quarter’s respective 72% and 84% beats). Below are some of the higher profile earnings reports this week.

Q3 earnings season is essentially over but there are still a couple of higher-profile companies scheduled to report next week (ex. CIEN, COST).

Monday: CASY, SFIX (after market close)

Tuesday: DSW (before market open); PVTL, AEO, PLAY (after market close)

Wednesday: PLAB (before market open); NDSN (after market close)

Thursday: CIEN (before market open); COST (after market close)

Friday: --


On Monday the VIX hit a one-month low of 15.95 (in part due to the perception of positive trade developments and the removal of the “G20 premium”) but subsequently rallied to a one-month high of 25.94 yesterday on the issues highlighted in the Review section above. It appears that ever since Powell commented that rates were a “long way” from neutral back on October 3rd, the VIX has established an elevated trading range of approximately 16.00-25.00. Of course, the VIX is reflecting the market volatility that has occurred since then but I would expect this range to remain intact as long as uncertainty around trade and rising interest rates persists.

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Technical Outlook:

S&P 500 Index ($SPX): Currently the SPX 50-day Simple Moving Average (SMA) has dropped below the 200-day SMA which in technical terms is referred to as a “Death Cross”. The last time this occurred was back in January of 2016 and it didn’t turn out to be that ominous for investors. Regardless, I honestly think any concern over a death cross takes a back seat to the risk of rising interest rates and the economic impact of an on-going trade war between the U.S. and China.

Setting the death cross discussion aside, the SPX appears to be in a 200-point trading range (~2,620-2,815) over the past 2 months and while it was encouraging to see yesterday’s intraday reversal off the bottom end of that range, today’s lack of follow-through buying is discouraging from a bullish perspective. If the SPX fails to hold the 2,620 level then I believe the next area of support would come in around 2,532, where buyers stepped in back on February 9th.

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Dow Jones Industrial Average ($DJI): Like the SPX, the Dow has been in a trading range over the past two months (~ 24,250-26,000) but it hasn’t encountered a technical death cross. Earlier today the Dow came within 12 points of its 200-day SMA and subsequently reversed course which isn’t bullish price action. If the Dow closes below the lower-end of its recent trading range the next levels of support appear to be 24,000 (late June low) followed by roughly 23,500 (Feb/April/May low).

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Russell 2000 Index ($RUT): The Russell has been the worst performer among the major averages (down roughly 16% from its August all-time high) and is currently testing the 1,460 level, which served as support back in late October and mid-November. If the 1,460 level doesn’t hold then it’s a relatively short trip down to the February intraday low (and 52-week low) of 1,423.   

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

10-Year Treasury Yields ($TNX): Ever since breaking out to seven year highs back on October 3rd (on hawkish Powell commentary), and re-testing those highs in early November, yields on the 10-year have been in a definitive downtrend. The precipitous drop in 10-year yields, which has largely been driven by concerns over global growth, contributed to the recent curve flattening which has fueled recent investor concerns.

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Economic Recap:

This week’s economic data was a mixed bag with the ISM reports surprising to the upside and various employment data points coming in below estimates. Let’s walk through the individual data points.

Better than estimates:

  • ISM Index: 59.3 vs. 57.2 est
  • EIA Crude Inventories: -7.3M barrels vs. -2.39M barrels est
  • ISM Services: 60.7% vs. 59.0% est
  • Productivity-Revised: 2.3% vs. 2.2% est
  • Unit Labor Costs - Revised: 0.9% vs. 1.2% est
  • University of Michigan Consumer Sentiment – Preliminary: 97.5 vs. 96.8 est
  • Wholesale Inventories: 0.8% vs. 0.7% est

In-line with Estimates:

  • Unemployment Rate: 3.7% vs. 3.7% est

Worse than estimates:

  • Construction Spending: -0.1% vs. 0.3% est
  • ADP Employment Change: 179K vs. 192K est
  • Factory Orders: -2.1% vs. -2.0% est
  • Initial Jobless Claims: 231K vs. 225K est
  • Trade Balance: -$55.5B vs. -$54.7B est
  • Average Workweek: 34.4 vs. 34.5 est
  • Average Hourly Earnings: 0.2% vs. 0.3% est
  • Nonfarm Payrolls: 155K vs. 189K est

Key takeaways from this week’s data:

  • Construction Spending has declined for three straight months and four times out of the last five reports
  • The 60.7% read on the ISM Services Index represents the second-strongest reading in 13 years
  • Factory Orders have declined three out of the last four monthly reports

Here’s a look at next week’s line-up:

  • Monday (10th): JOLTS – Job Openings
  • Tuesday (11th): Producer Price Index (PPI), Core Producer Price Index (PPI), NFIB Small Business Optimism Index
  • Wednesday (12th): Consumer Price Index (CPI), Core CPI, EIA Crude Inventories, MBA Mortgage Applications Index, Treasury Budget
  • Thursday (13th): Continuing Claims, Empire Manufacturing, Export Prices, Import Prices, Initial Jobless Claims, Natural Gas Inventories
  • Friday (14th): Business Inventories, Capacity Utilization, Industrial Production, Retail Sales, Retail Sales (ex-auto)

Next week is going to be busy. In addition to a Brexit Vote on Tuesday (11th) and an ECB meeting on Wednesday (12th), there are multiple U.S. economic reports worth monitoring: Tuesday’s PPI data, Wednesday’s CPI data (inflation continues to be an important factor in the current environment), Thursday’s Export/Import Prices (i.e. tariffs) and Friday’s Retail Sales reports (to help gauge consumer spending habits).


Heightened uncertainty translates into heightened volatility, which is likely to persist next week – consider a cautious stance.        

All of the major U.S. indices are just off the lows of the day at the time of this writing (2:19 PM ET) with the Dow Jones Industrial Average (DJI) down 488 to 24,459, the S&P 500 (SPX) lower by 50 to 2,646, and the NASDAQ Composite (COMPX) dropping 167 to 7,020. Today’s price action on its own is pretty bearish, but when you consider that investors essentially ignored this morning’s “Goldilocks” Nonfarm Payrolls number (i.e. not too hot for the Fed, not too cold for the economy) and mid-day dovish commentary from Federal Reserve President James Bullard (who said the Fed could pause at this month’s FOMC meeting), and it seems pretty evident that investors are taking a “risk-off” stand heading into the weekend.

For reference, the probability of a December hike has dropped another 3 ticks to 69% since I mentioned it above. Heading into next week, I just think that there are too many issues for investors to grapple with (trade relations, rising interest rates and an upcoming FOMC meeting, inverted yield curve, Brexit vote, etc.) to reverse the recent market downdraft and suggest caution in the near-term. Therefore, my outlook for next week is volatile and moderately bearish.

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