Day Traders Diary

12/18/18

The S&P 500 finished flat on Tuesday in what was another roller-coaster session, driven by shifts in sector leadership, a 7.2% plunge in oil prices to $46.57 per barrel, and lingering uncertainty surrounding trade, monetary policy, the economic growth outlook, and the budget battle in Washington to keep the government open.

The benchmark index was up as much as 1.1% in early action, bolstered by some technical buying after the S&P 500 managed to hold support at its February low (2532.69) on Monday. That rally, however, would not hold up. 

Once again, the stock market succumbed to an inclination to sell into strength that saw the S&P 500 set a new low for the year (2528.71) entering the final hour of trading.  Like Monday, though, there was some late buying interest on the re-test of the February low, which held once again on a closing basis.

The Dow Jones Industrial Average (+0.4%) and the Nasdaq Composite (+0.5%) managed to squeeze out some modest gains, yet they also finished well off their best levels of the day. The Russell 2000 shed 0.1%.

The S&P 500 sectors were mixed with consumer discretionary (+1.0%) and real estate (+1.0%) on the winning end, and energy (-2.4%) and consumer staples (-1.2%) on the losing end.

The S&P 500 financial sector (-0.5%) was another notable laggard and it stood out as the poster child for selling into strength.  The financial sector was up as much as 1.6% during the rally effort, yet a poor showing by the bank stocks undercut the sector and led to another losing outing for the sector, which is down 11.7% this month alone.

The inability of the financial sector to hold its gains was a disappointment, yet it has been consistent with the sector's disposition all year, and particularly since the start of October.

Also weighing on sentiment was the fact that oil prices continued to get clobbered amid ongoing concerns over excess supply and slowing economic growth. WTI crude dropped 7.2% to $46.57/bbl, closing at its lowest level since September 2017. The oil-sensitive energy sector underperformed with a loss of 2.4%.

The weakness in the financials and oil prices, as well as in copper prices ($2.66, -$0.09, -3.3%), underscored the general growth concerns that have been weighing heavily on investor sentiment.

Those concerns, and concerns about the stock market's fortunes, showed up in the gains registered by the Treasury market and CBOE Volatility Index (VIX 25.61, +1.09, +4.4%) even while stocks were rallying. The Fed-sensitive 2-yr yield lost four basis points to 2.66%, and the benchmark 10-yr yield lost three basis points to 2.82%. The U.S. Dollar Index was flat at 97.09.

The disparate action came ahead of Wednesday's interest rate announcement from the FOMC and the release of an updated summary of economic projections and dot plot. 

Market participants are largely expecting the FOMC to raise the target range by 25 basis points to 2.25% to 2.50%.  What remains a pertinent source of uncertainty is what the Federal Reserve will do with its interest rate projections and possibly its balance sheet normalization effort.

The market is pining for a dovish-minded stance from the Federal Reserve when it comes to its interest rate projections for 2019.  Everything will come to light at 2:00 p.m. ET on Wednesday and it will certainly be a market-moving event.

Reviewing Tuesday's economic data, which included Housing Starts and Building Permits for November: 

• The Housing Starts and Building Permits Report for November wasn't as strong as the headline figures suggested, as it featured little to no growth in both permits and starts for single-family units. 
  • Total starts increased 3.2% to a seasonally adjusted annual rate of 1.256 million units (Briefing.com consensus 1.230 million), yet starts for single-family units declined 4.6% to 824,000, which is the lowest since May 2017.
  • Total permits increased 5.0% to a seasonally adjusted annual rate of 1.328 million (Briefing.com consensus 1.270 million), yet permits for single-family units were up just 0.1% to 848,000.
  • The key takeaway from the report is that it substantiates the weakening levels of homebuilder confidence and is a reflection of the impact rising interest rates are having on single-family construction activity.

Looking ahead, investors will receive the FOMC Rate Decision for December, Existing Home Sales for November, the weekly MBA Mortgage Applications Index, and the Current Account Balance for Q3 on Wednesday.

• Nasdaq Composite -1.7% YTD
• Dow Jones Industrial Average -4.2% YTD
• S&P 500 -4.8% YTD
• Russell 2000 -10.3% YTD

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  • Headlines provided by briefing.com