V is for Volatility.

V is for Volatility.  In a volatile session, stocks followed a “V” pattern trading off early in the session only to turn up and close in the green, led by hated-yesterday-loved-today technology.  Markets started the day on negative footing as traders reflected on European Union turmoil and emerging market slowdowns and just when it looked like it was going to be another painful session Apple along with the plunge protection team (a group of Administration folks who mysteriously leak positive but not necessarily meaningful news about trade talks with China) pulled up on the hand break clearing a path for a rally into the close.  In fact, not even negative China comments by economic advisor Wilbur Ross could dampen the rally.  The rally resulted in the S&P500 closing just around its session highs.  The Index rallied +1.06% yesterday after trading below 2700 earlier in the session.  The S&P will get resistance above from its 2747 Fibonacci line and its 200 day moving average (see chart 4 in my attached daily chartbook).  The VIX volatility index remains high closing with a 20 handle indicating more volatility ahead (as if we needed an index to tell us that).  The Dow Jones closed near its session highs above its 200 day moving average.  The Dow remains in the pivotal area between its 200 day moving average at 250094 and its 25479 Fibonacci line (see chart 6 in my attached daily chartbook).  The small cap Russell 2000 index posted a +1.44% gain closing at its session high right on its 1525 Fibonacci resistance line (see chart 7 in my attached daily chartbook).  Further gains and closes above this line will be critical for the index which continues to languish.

The small cap index is an overall market health indicator and is a go-to for value investors, so strength in the Russell will be a critical component of a sustained equity turn around.  The tech heavy NASDAQ 100… need I say more?  The index jetted up +1.78% in yesterday’s session led by Apple, which climbed +2.74% following a positive report from Morgan Stanley.  Apple has found its way into several of my market notes this week and I suspect that its influence over the broader markets will continue to be present in the days and weeks ahead.  In the bond world, higher yielding corporate debt spreads are widening.  That means that yields relative to similar maturity treasuries are increasing.  What that really means is that investors are requiring more premium for taking risk, which occurs when there is a belief that the potential for default or downgrades may be ahead.  The high yield bond market is a good indicator of overall market sentiment for 2 primary reasons: 1) they are typically held by institutions who are allegedly more sophisticated and act more rationally than the day traders and odd-lotters that dominate the stock markets and 2) they are like a hybrid between bonds and equities as their strength is determined by corporate health.  We should always keep an eye on the high yield bond market as an indicator for equities.

Widening spreads have been exacerbated by the slip in crude oil prices which impact the health of the many energy companies that use high yield credit to finance their operations. Bonds overall had a volatile day yesterday ultimately closing flat on session and ten year yields were slightly down closing at around 3.11%.

Today we have only 1 pre-market earnings release from Viacom who is expected to show earnings of $0.95 per share.  While we are on the topic of earnings, semiconductor companies Nvidia and Applied Materials released their earnings after yesterday’s closing bell and Nvidia missed its projected earnings by 4.3% while Applied Materials beat by a slight 0.4%.  Both of the companies traded off significantly after hours and how they are treated in today’s regular session will certainly have an impact on today’s markets.

Overnight, WHILE YOU SLEPT, UK Prime Minister Theresa May continued her wrangling with political opponents on Brexit negotiations and hit a few setbacks.  The trouble in UK combined with the further contemplation of Wilbur Ross’ initially ignored warning on China softened equity futures markets overnight.  This morning we will get Industrial Production which is expected to show a growth of +0.2% versus last months +0.3%.  Next week will be abbreviated by the Thanksgiving holiday but will feature some housing numbers, sentiment numbers, Durable Goods orders, and several more important earnings releases. Those combined with the expected lower volume can only mean that continued volatility is in store for the markets.  Have a great weekend and please call me if you have any questions.

daily chartbook 2018-11-16