On the rebound

The stock market was complacently going about its winning business yesterday when it was struck by a rush of selling interest in afternoon trading. The S&P 500, which hit 4,778 at yesterday’s high, closed the session at 4,698, down 1.5% for the day.

The obvious question is, what happened? The easy answer is that the market finally succumbed to general profit-taking interest after its huge run from late October. The vague answer, but one that seems easier to account for as the precipitant for the abrupt reversal, was trading activity in zero-day options, according to an industry source interviewed by CNBC at the time.

Your author won’t profess to knowing the mechanics, or the basis, for why the options trade might have been the catalyst for the selloff, but “general profit taking” seems a little too easy as the explanation considering the market was on cruise control, riding on a smooth road, when all of a sudden the tires blew out.

In any case, the rebound bid in the equity futures market this morning suggests yesterday’s selloff was the result more of esoteric trading behavior than everyone, en masse, suddenly agreeing that they should take some money off the table.

That rebound bid, however, isn’t just buy-the-dip fluff. There is some resonance behind it that includes better-than-expected results and guidance from Micron (MU), lower oil prices ($72.84, -1.38, -1.9%) on a Reuters report that Angola is leaving OPEC, Air Current reporting that Boeing (BA) has secured CAAC clearance for 737 Max deliveries in China, and yet another pleasing weekly initial jobless claims report that fits neatly with the soft landing narrative.

Briefly, initial jobless claims for the week ending December 16 increased by 2,000 to 205,000 (Briefing.com consensus 218,000) and continuing jobless claims for the week ending December 9 decreased by 1,000 to 1.865 million.

The key takeaway from the report is virtually the same as last week, because initial claims were virtually the same in the latest week: the level of initial claims is still a long way from being associated with levels registered during a recession.

We know from the third estimate for Q3 GDP, which was released at the same time, that the economy was a long way from recession in the third quarter. Real GDP was revised lower, but it was still a heady 4.9% (Briefing.com consensus 5.2%) versus the second estimate of 5.2% and 2.1% in the second quarter. The GDP Price Deflator, meanwhile, was revised down to 3.3% (Briefing.com consensus 3.6%) from 3.6% in the second estimate and 1.7% in the second quarter.

The key takeaway from the report is that the downward revision largely reflected a downward revision to consumer spending growth to 3.1% from 3.6% in the second estimate.

Separately, the December Philadelphia Fed Index checked in at -10.5 (Briefing.com consensus -3.0) versus -5.9 for November. A number below 0.0 for this series is indicative of contraction.

The key takeaway from this report for a market anticipating a soft landing is that most future activity indicators rose, which points to widespread expectations for overall growth for the next six months.

Treasuries seemed to like the totality of the data. The 2-yr note yield, which is most sensitive to changes in the fed funds rate, is down three basis points to 4.32%, and the 10-yr note yield is down four basis points to 3.84%. By the way, the 10-yr note yield settled 2022 at 3.88%, so the yield, which hit 5.02% on an intraday basis in mid-October, is now down for the year.

As far as stocks go, they appear to be exercising an option to move higher and exorcising yesterday’s devilish selloff.

Currently, the S&P 500 futures are up 35 points and are trading 0.8% above fair value, the Nasdaq 100 futures are up 169 points and are trading 1.1% above fair value, and the Dow Jones Industrial Average futures are up 224 points and are trading 0.7% above fair value.

—

Originally Posted December 21, 2023 – On the rebound