One bad Apple!

One bad Apple!  Stocks eked out small gains after opening deeply in the red yesterday.  Traders awoke to lower stock futures as indexes slid in Asia over trade worries and the Dow was down over 300 points within minutes of the US open, reminding traders that while December is in the rear view mirror, volatility is here to stay.  As the session progressed, optimism slowly crept back in and a small rally in crude oil helped pull markets up for a modestly positive close.  The real reason for the positive move in stocks was most likely institutional buyers putting on their first trades of the new year.  If the precipitous drop in equities in Q4 had a silver lining it is the improved valuations that now exist for managers waiting on the sidelines.  Most asset managers can only go long, or buy, stocks and when stocks sell off they are usually quick to load up on their favorites… unless it is December in a losing year.  Many managers began to give up in November by tightening their stops to minimize any potential large losses.  The tighter stops only added to the volatility of the markets causing more losses to rack up.  By the first week of December many investors resolved to wait for 2019 to get back in to the market in order to lock in whatever profits they earned or, in many cases, to limit the losses they had earned.  That left operational trading which included tax loss harvesting and rebalancing which ruled the markets for the latter half of the month.  Now that 2019 has arrived, long-only investors can get back in with a clean slate. Recall that most managers judge their performance in calendar years.  To be clear, the same hindering factors exist from last month but now managers have a whole year ahead to make things right… hopefully. The government shutdown is now in its second week, the China trade war continues, higher short term interest rates appear to be affecting at least some of the housing sector, and global economies are showing signs of weakness (particularly China), so there are plenty of reasons for investors to stay defensive.  On the brighter side the economy continues to perform above average despite showing some signs of slowing and the Administration seems motivated to bring an end to the Chinese trade issue.  In fact, the President called December’s stock slump “a glitch” and expects that once the Chinese trade situation is resolved the market will rally.  That is my kind of optimism.

This morning we received the ADP employment change number and it showed a gain of 270k new jobs versus last month’s 179k, beating estimates of 180k jobs.  The ISM manufacturing PMI that I highlighted in yesterday’s geek-out Wednesday note comes out later this morning and it is projected to be 57.5 down from last month’s 59.3.  Some auto manufacturers will begin to report revenue and vehicle sales, which will be closely watched for signs of deterioration.  The auto industry, like housing, is highly sensitive to interest rates and many will be watching to see if the Fed’s recent moves are having an effect.  Finally on to Apple.  Last night after the bell Apple provided negative forward guidance announcing that revenues would be lower than projections due to weaker demand in China.  Though the handwriting may have been on the wall, last night’s announcement (the first in almost 20 years) sent futures tumbling.  Many analysts were quick to respond with lower price targets on both Apple and its broad ecosystem of component manufacturers. Futures are pointing to a negative open as one bad Apple can spoil a market, especially if it is a big factor in all of the major indices  (S&P500, Dow Jones Industrial Average, and NASDAQ 100).  Another day of volatility is surely in store for traders and it will be interesting to see if good (such as the ADP beat) is perceived as good or bad by the markets.  Please call me if you have any questions.

daily chartbook 2019-01-03