Waiting for Santa: Stock Futures Move Cautiously Upward After Weeks of Rally-Killing Trading

(Monday Market Open) It’s less than a week until Christmas, and the guy in the red suit hasn’t shown up on Wall Street yet.

The major indexes are coming off consecutive losing weeks for the first time since September and are down 4% to 7% so far this month. That’s very unusual for December, when the so-called “Santa Claus rally” often means rising prices.

Stocks edged up this morning, and the S&P 500 Index® (SPX) starts the week right near an interesting level on the charts at 3,850. The SPX closed Friday just above that, and holding it today could give the market a bit of stability going into the new week. If 3,850 can’t hold, it might be a stair-step down to support at 3,845 and 3,840.

However, a drop below 3,840 might open a gap down to lower levels.

We’ll see if we can hold this current stability. It would be a good sign for the markets if we could build a base right here heading into the new year. If 3,850 can’t hold, it might make participants nervous about the possibility of having to find a new level farther down where support can take hold.

Overseas, there are reports of rapidly rising COVID-19 cases in China this morning. The Bank of Japan meets early Tuesday and analysts expect it to keep rates unchanged.

European energy ministers were also meeting to set limits on the price of natural gas against continuing pressure from the Russia-Ukraine war.

Morning Rush

• The 10-year Treasury yield (TNX) was up a notch at 3.53% and seems to be in a solid range between 3.4% and 3.6%.
• The U.S. Dollar Index ($DXY) is down slightly at 104.6.
• Cboe Volatility Index® (VIX) futures are stable near 22.67, implying market participants don’t expect too much near-term volatility.
• WTI Crude Oil (/CL) is up slightly at just above $75 per barrel, but keep an eye on rising COVID-19 cases in China, which could sap crude demand.

/CL just can’t stop bumping its head on a downtrending line that extends from the early November high of $93.74 per barrel to just above current price levels. That line is currently near $77 per barrel. Twice last week, /CL scrambled back after briefly testing that technical level, and failure to climb above $77 and stay there might mean a bearish near-term outlook for front-month futures. The December low just above $70 remains a possible support area on any further pullbacks.

Nike at Starting Line

The key earnings report this week is Nike NKE, expected after the close Tuesday. Shares went on a tear from early October to mid-December, rising 36% amid hopes for a reopening of the Chinese economy and Wall Street reports of strong brand performance. Many analysts remain upbeat on the stock despite the dive it took over the last week. One question is whether the company made progress chewing through its inventory issues, which weighed on shares earlier this year.

Another company to watch this week is chipmaker Micron MU, which has moved pretty much the polar opposite of NKE’s shares over the last two months. MU, which is expected to report after the close Wednesday, posted weak results and a gloomy outlook in late September. Like housing, the chip industry can also be a good barometer of consumer demand.

So can deliveries of goods, which is why we’ll have our eyes on FedEx FDX earnings Tuesday after the close.

Another stock in the news early this week is Tesla TSLA, which saw futures rise 3% in premarket trading after a Twitter (TWTR) poll came out in favor of TSLA CEO Elon Musk stepping down from his position as head of TWTR.

Data-wise, the week is backward-weighted. Thursday and Friday bring a host of numbers including the final government reading on Q3 Gross Domestic Product, December Consumer Sentiment, November New Home Sales, November Durable Orders and November Personal Consumption Expenditure (PCE) prices. The PCE data might be the biggest one to watch. Consensus on Wall Street now is for a 0.3% rise. This is the inflation indicator most closely followed by the Fed.

Numbers to Know

• 4.25% – 4.35%: That was approximately highest range for the 10-year Treasury yield (TNX) this year, and it’s probably not coming back, according to Schwab Chief Fixed Income Strategist Kathy Jones, speaking late last week during Schwab’s 2023 Market Outlook podcast. Jones said she’s been suggesting “that investors increase duration or add some intermediate or longer-term bonds to their portfolios to lock in those higher yields while they’re still available.” A major difference entering 2023 versus 2022 is that “starting yields are much higher now, and that means even if interest rates do move…somewhat higher from here, there’s still a good likelihood that returns for fixed income investors will be positive,” Jones added. She believes the bulk of Fed rate hikes is probably behind us and inflation is starting to abate. Check out the podcast link above for additional 2023 insight from Jones as well as from Schwab Chief Investment Strategist Liz Ann Sonders, Schwab Chief Global Investment Strategist Jeffrey Kleintop, and Schwab Managing Director of Legislative and Regulatory Affairs Mike Townsend.
• 3,819: Call it a minor victory for a market that’s generally been losing the 2022 war. The SPX closed lower Friday for the third-straight session following the Fed meeting. However, it finished well off lows after coming within a whisker of key technical support. The Friday SPX low of 3,827 was only 9 points above 3,819, which represents the 38.2% Fibonacci retracement level from the March 2020 low to the January 2022 peak. Keep an eye on the 3,819 level as the week advances to see if it gets another test.
• -2.8%: That’s the latest FactSet estimate for Q4 S&P 500 earnings performance, down sharply from the September 30 estimate of 3.7%.
• 5.3%: Analysts still see full-year 2023 earnings growth at 5.3%, according to FactSet. We’ll be looking for this to decline once everyone gets back in January and analysts rethink how the Fed’s forecast of rising rates and a stumbling economy might affect corporate health.

Reviewing the Market Minutes

The last hour of Friday’s session saw a comeback of sorts for some of the more “risk-on” sectors including financials, information technology, and communication services. Some buyers appeared to step back in for semiconductor shares, which had been beaten down earlier in the day, as well as for some of the mega-caps that went south during much of the week. Though the rally lost steam in the very last minutes Friday, we’ll see if any positivity spills into today’s session.

All 11 sectors finished lower Friday, with real estate taking the biggest hit. Communication services had the best performance, likely due to an analyst upgrade of Meta Platforms (META), according to Briefing.com.

Here’s how the major indexes performed Friday:

• The Dow Jones Industrial Average® ($DJI) declined 281 points, or 0.85%, to 32,920.
• The Nasdaq® ($COMP) fell 0.97% to 10,705.
• The Russell 2000® (RUT) gave back 0.63% to 1,763.
• The SPX fell 43 points, or 1.11%, to 3,852.

For the week, the SPX fell 2%, the $COMP fell 2.7%, and the RUT fell 1.8%.

Talking Technicals: Last week you read here about a support range on the SPX chart between 3,920 and 3,940. That was the bottom end of a broader trading range between 3,900 and 4,100 that had held up for about a month. Thursday and Friday knocked out that relatively range-bound trading pattern as the SPX descended below 3,900 for the first time since November 9 amid recession fears. There appeared to be a lot of automatic selling generated by the slide below 3,900, judging by how quickly the drop-off accelerated Friday.

So does this mean the SPX is primed for another test of the October low, down under 3,600? Not necessarily, though you can’t rule that out, especially if earnings estimates turn south. Perhaps an earlier place to look for technical support is at the previously mentioned Fibonacci retracement level of 3,819. Below that, there doesn’t seem to be much in the way of technical support until you get down near the November low, around 3,709.

Three Things to Watch

Home for the Holidays: It’s not “infrastructure week,” but it is housing week on Wall Street. The housing market is often seen as a useful barometer of the wider economy, so keep that in mind as you watch for Tuesday’s November Housing Starts and Building Permits data, due before the open, and Wednesday’s November Existing Home Sales, due after the open. The starts and permits provide the best forward look at housing demand, and both trended lower the last three months heading into November.

 

• Housing starts decreased 4.2% month over month in October to a seasonally adjusted annual rate of 1.425 million, from an upwardly revised 1.488 million (from 1.439 million) in September.
• Building permits dropped 2.4% month over month to a seasonally adjusted annual rate of 1.526 million, from an unrevised 1.564 million.

Mortgage rates did begin falling in November, but it’s unclear if that’ll be enough to get permits and starts back onto a positive path. However, Barclays did upgrade homebuilder Lennar (LEN) last week, saying the housing market might “trough” in 2023. LEN and some other big homebuilder stocks like KB Home (KBH) and DR Horton (DHI) have been on an upswing and held onto those gains a bit better than the broader market during the cave-in late last week.

Home Builders Face Challenges: Lower mortgages may help home demand at some point, though signs of that aren’t really flashing yet. LEN saw new home orders fall 15% in its latest quarter. Rising deliveries and sales prices continued to buttress LEN’s balance sheet, but it’s unclear how long those metrics will hold up if the economy continues to struggle and the Fed stays the course on promised rate hikes. In its earnings press release, Lennar Executive Chairman Stuart Miller said, “As we have seen over the past quarters, interest rates are fluctuating and are likely to continue to move, and the housing market will continue to rebalance pricing and interest rates.” The next major homebuilder to report will be KBH, with its call scheduled for January 11.

VIX Check-In: Despite last week’s sell-off, the VIX actually fell slightly over the course of those five days, finishing below 23. Make of it what you will, but when you see the stock market decline 2% to one-month lows while the VIX barely budges, it’s one of those odd situations that doesn’t make a lot of sense. Volatility usually climbs when stocks fall. One or the other (stocks or the VIX) is likely going to have to switch course soon for things to be on track, but the VIX right now could be telling us that the Wall Street selling doesn’t have a lot of conviction 

Notable Calendar Items

Dec. 20: November Housing Starts and Building Permits and expected earnings from General Mills (GIS) and Nike (NKE)

Dec. 21: November Existing Home Sales and expected earnings from Rite Aid (RAD) and Micron (MU)

Dec. 22: Government’s final Q3 GDP estimate and expected earnings from CarMax (KMX)

Dec. 23: November Durable Orders, November Personal Income and Spending, November PCE Prices, November New Home Sales, and Final December University of Michigan Consumer Sentiment

Dec. 26: Markets closed for official Christmas Day holiday. Enjoy if you celebrate!

Dec. 27: December Consumer Confidence

Dec. 28: November Pending Home Sales

 

TD Ameritrade® commentary for educational purposes only. Member SIPC.

 

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.
Image sourced from Shutterstock