I discussed the continued stock market decline on Yahoo Finance, The Final Hour with Seana Smith, after the Plunge Protection Team was called in late Sunday evening. Will the comments by Treasury Secretary Mnuchin be a catalyst to bring the market higher? I don’t think so. It’s a weak attempt to assuage investor confidence that actually had the opposite effect. The S&Ps entered bear market territory and experienced there worst Christmas Eve ever. Now what?
What Does Today’s Price Action Mean?
Today, the market opened for a half-day on Christmas Eve. Half days before holidays are typically low volume and relatively choppy, but that isn’t what Mr. Market gave us today. As I write this at market close, S&Ps are down 71 points (-2.95%) to $2342.25, after breaking key Voodoo support at $2363. There was a mediocre intraday rally around 9am CT where sellers quickly came in to show who is boss. The selling never really let up, with the S&Ps going out on the dead lows.
Overall Market Outlook
I am bearish this market primarily because there is nothing holding it up. All 11 sectors in the S&Ps are getting hit in this broad sell-off. Throughout previous corrections this year, relative strength sectors such as consumer staples (XLP), healthcare (XLV) and utilities (XLU) would remain strong. The S&Ps were teeter tottering back and forth like a see-saw, being held up by these three. Then, what happened? Last week, the selling hit them as well, in a very deep way.
Check out this image below to see the S&P sectors on 12.24.18.
Without money flowing into at least 3 of these sectors, and, the FAANGs, there is no way the market can trade higher.
So, what am I looking for? As far as the sectors go, I have my eyes on financials, industrials, and transportation stocks, as well as the FAANGs, to tell me where this market is going to go. Typically, the transportation stocks will shift before the market, so I’m watching IYT, the transportation ETF, for a potential ‘Santa Rally’ signal. So far, it continues to trade lower and went out on the dead lows today. This is very bearish.
As far as the FAANGs go, Google and Facebook have met downside targets at $986 and $121 respectively, as well as key support. AMZN has held $1307 blew through the $1320 target I had but then stabilized. While I don’t consider these long term buys here, they could potentially be very short-term buys if and when the market bottoms and we could trade them back to the mean. But – they aren’t ready yet.
FAANG lead the market lower, and I will watch them to see if they want to lead the market higher.
The Case of Microsoft (MSFT)
I’ll be the first to admit I was wrong about MSFT breaking out of consolidating and making a price target of $120 with the weekly squeeze. But, there is an important point to be made here. Microsoft held up very well throughout October and November, and it’s fundamentals are strong. Last quarter, they continued to show growth and even positive guidance for next quarter. MSFT with the likes or Oracle (ORCL), (CRM) and Cisco (CSCO) were still holding up despite the slaughtering stocks like NFLX and FB were seeing.
Well, between last week and this week, that has all changed. Check out this weekly chart of Microsoft.
As much as I hate to say it, the weekly squeeze has fired short and I’m now targeting $85.
The most critical part about this price action is what it means for the overall market. If investors can’t even have confidence in strong, fundamental stocks, nor typical areas where investors put their money during downturns such as utilities or staples, what does that mean?
Well, without any buying, stocks will continue to fall until buyers are willing to step in.
Is There a CHANCE Santa Will Come?
I am bearish this market on a larger time frame but, as many of you know I have been watching for a potential extremely oversold condition that could lead to a short squeeze turned Santa Rally. For me, the Santa rally starts after Christmas and we look for that within about a 5 day window after Christmas, and this is when I’ll look for it.
So, what do we look for? When the S&Ps get this oversold, especially with such a high put/call ratio and reaching key support, generally I look for about a 100-150 point rally.
Check out this video to learn more about the technical parameters for the Santa Rally:
However, keep in mind that even if we get a short-squeeze, 150 point rally, that does not mean that the bearish trend will be corrected. We are still 550 S&P points off of the high made in September, and to recover this would require a significant catalyst – one that an oversold, dead cat bounce/Santa Rally is unlikely to be. Without a significant catalyst and/or significant investor confidence, I believe we will fail at that rally.
Check out the SPX chart below for deeper areas of support.
Potential Buying Catalysts
Honestly, I don’t see a significant catalyst on the horizon. Trump tweets, government shutdown, Treasury Secretary Mnuchin trying to convince everyone calling in the Plunge Protection Team is a good thing, etc – all continue to weigh heavily on the markets that are technically broken. Even news of resolution of a trade war with China, I really don’t think will do the trick at this point. I think the only possibility for a trade higher from here comes when everyone who wanted to sell, sells. Only then can we bottom out, and prices will stabilize. Then, we can come in and buy. But, we are not there yet.