Day Traders Diary

1/10/19

The S&P 500 gained 0.5% on Thursday, extending its winning streak to five straight sessions. The Dow Jones Industrial Average gained 0.5%, the Nasdaq Composite gained 0.4%, and the Russell 2000 gained 0.5%.

10 of the 11 S&P 500 sectors finished higher with real estate (+1.6%), utilities (+1.4%), and industrials (+1.4%) leading the advance. Conversely, the consumer discretionary sector (-0.2%) underperformed.

It wasn't easy, as investors wrestled with some earnings warnings and some comments from Fed Chair Jerome Powell, but the story of the day once again involved buying the intraday dips and the market remaining resilient to selling efforts.

The S&P 500 lost as much as 0.9% shortly after the start of trading amid a prevailing sense that the broader market may have gotten overbought on a short-term basis. Entering the session, the benchmark index was up 10% from its Christmas eve low. 

In addition, earnings warnings from department store Macy's (M 26.11, -5.61, -17.7%) and airline operator American Airlines (AAL 32.04, -1.38, -4.1%) helped catalyze the opening selling activity, as they provided ample excuses to take some money off the table. Macy's also acted as an influential drag on the SPDR S&P Retail ETF (XRT 43.60, -0.71, -1.6%).

Despite these warnings, stocks staged a morning rebound effort into positive territory. This resilience to selling efforts presumably drew in sidelined participants fearful about missing out on further gains and pushed out weak-handed short sellers expecting a downturn.

The second dip brought the S&P 500 from a gain of 0.3% to a loss of 0.5% in afternoon trading. The dip occurred during Fed Chair Powell's participation in a Q&A session at the Economic Club of Washington and following a tweet from President Trump to say he is canceling his trip to the Davos World Economic Forum on account of matters related to the partial government shutdown. 

Headlines would suggest the dip was attributed to Mr. Powell's observation that the Fed's balance sheet will be substantially smaller than it is now, but larger than before. However, the market managed to regroup, cognizant that Mr. Powell wasn't suggesting anything the market didn't already know. 

The balance sheet will eventually be "substantially smaller," because it got bloated on the other side of the 2008 financial crisis.  Since the economy and financial system are no longer in the dire straits of that perilous time, it only makes sense that the balance sheet would one day be substantially smaller.  Moreover, it was only last week that Mr. Powell conceded that the Fed "wouldn't hesitate to make a change" to its balance sheet normalization plan if it was necessary.

True to recent form, the S&P 500 climbed back into positive territory and closed near its session high, which was just below the 2600 level.

Reviewing the weekly Initial and Continuing Claims report, which was the only economic data to be released on Thursday:

• Initial claims decreased by 17,000 to 216,000 (Briefing.com consensus 225,000) for the week ending January 5. Continuing claims for the week ending December 29 decreased by 28,000 to 1.722 million.
  • The key takeaway from the report is that it fits neatly with the market's latest awareness that the labor market has held up fine despite the burgeoning concerns about the economy slowing.

Looking ahead, investors will receive the Consumer Price Index for December and the Treasury Budget for December on Friday.

• Russell 2000 +7.2% YTD
• Nasdaq Composite +5.3% YTD
• S&P 500 +3.6% YTD
• Dow Jones Industrial Average +2.9% YTD

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  • Headlines provided by Breifing.com