The U.S. stock markets rallied last Thursday in what likely amounted to the end-of-the-year rebalancing trade. Meanwhile, the Russell 2000 small-cap index, which had been the weakest market during the sell-off, saw the biggest rise, leading us to think it was short-covering.
During Friday and Monday’s sessions, stocks traded quietly. It seems most of the work was done Thursday to allow large funds to take off Friday and Monday, extending the holiday weekend through Tuesday when stocks were for New Year's Day.
Overnight, Asian markets all closed lower led by the Hang Seng which was down 2.77%, further evidence that the trade war has hurt China which had released a bearish PMI number. European markets didn’t react any more strongly with all the majors closing lower.
The equity futures reopened in the U.S., and after the S&P 500 rallied modestly on the open, it then dropped nearly 70 handles in what seems to be the routine of the last three months.
The U.S. government shutdown is now in place, and headline risk looms over U.S. equities. In prior years, these matters have eventually gotten settled, but the current political situation is far less certain than in prior years. The economic calendar today is mostly quiet, but it does have a PMI number scheduled at 9:45 a.m. EST that will be worth paying attention to.
It’s the first day of 2019 and there is money on the sidelines following the well-reported historical stock liquidation by mutual funds in recent weeks. With some seeing winds of recession on the way, part of this money has been entered into fixed-income assets such as U.S. Treasury bonds and notes.
Last week, we made the case that this the rally in stocks was a dead cat bounce, and on the chart below, the S&P 500 appears to be reversing at the nine-day simple moving average where resistance has been lately.
These markets still have us overwhelmingly cautious and reluctant to dig our heels in on either side. In the same way that for years those people who were calling for market tops have been run over, during this sell-off that began in mid-September, the bulls that called for blind dip buying have been the ones getting run over lately.
Danny Riley, founder of MrTopStep, often says “The markets will do what screws the most people.” We think a lot of people are getting hit on the way down. We continue to advise traders to be cautious, trade small in the early part of the new year, and be willing to trade both sides of the market while not stubbornly trying to fight a trend.