Better late than never! Christmas showed up a day late for equities as they surged in record point gains. The Dow Jones Industrial Average rose over 1000 points (+5%) in yesterday’s session which was the largest point gain as well as the largest post-Christmas rally in history. From a percentage perspective, yesterday’s move on the Dow represents the largest since the financial crisis. The S&P500 rose by +4.96% closing at its session highs, the small cap Russell 2000 edged up also by +4.96%, and the NASDAQ 100 Index jumped by +6.16%. Not shockingly, the NASDAQ 100, which features the 100 largest non-financial NASDAQ stocks (AKA tech), led the rally. Traders lumbered to their desks yesterday morning after experiencing the worst pre-Christmas sell-off in history with a glimmer of hope as positive data began to hit the tapes detailing a strong holiday season for retailers, which experienced the largest growth in more than 5 years. To add fuel to the fire, the President expressed his support for Treasury Secretary Steve Mnuchin and folks close to the President relayed support for Fed Chief Powell. Finally, badly beaten crude oil found some footing yesterday as WTI managed a +8.68% rally. Extreme oversold conditions with traders desperate for good news got what they needed yesterday. What is interesting is that a lot of buying took place in highly shorted stocks indicating that short covering was a big factor in yesterday’s session as well. While short covering is still buying it represents a closing action versus an outright buy which is an opening action. One is taking risk off and the other is putting risk on. Additionally another interesting trend has begun to take hold and warrants attention going forward. Recall how defensive sectors have been outpacing cyclical and growth oriented ones in recent months. Most notable was the utilities sector which is still the only positive sector in the last 60 trading days (see chart 2 in my attached daily chartbook). The second best, or next-least-worst depending on how you view things, was consumer staples which is also a superlative for a defensive sector. If we look back over the past week, those two sectors were some of the worst performers. The concern that arrises is that all sectors, regardless of their profile, are under selling pressure indicating a more broad bearish sentiment. While this trend is only short term, it certainly suggests that further scrutiny should be applied going forward. Yesterday was certainly a display of positive animal spirits but putting things into perspective, yesterday’s move has put us back to where we were last Thursday, so we still have some work to do before it can be said that we are out of the woods. Bonds traded off yesterday but far from the extremes to which stocks jumped. Ten year yields rose by +2.54% to around 2.8% and they will start today’s session at 2.77%. The 2/10 yield curve which traded below 10 basis points just a week ago will start the session at 18 basis points.
Today, we will get Initial Jobless Claims which is expected in at 216k new claims versus last week’s 214k. Claims, which spiked a few weeks ago raising eyebrows, have since retreated below the 3 month moving average, which is around 217k / week. Later this morning we will get the FHFA Housing Price Index which is expected to show month over month growth of +0.3% slightly higher than last month’s +0.2%. An important indicator to watch is the Confidence Board’s Consumer Confidence number which is forecast to be at 133.7 compared to last month’s 135.7. WHILE YOU SLEPT, economic releases in Asia indicated a further slowing of the world’s second largest economy which will likely put more pressure on President Xi to find a solution to the current impasse with the US. Stock futures are indicating a lower open as we start the day wondering if yesterday’s move was the start of something bigger. Please call if you have any questions.