Market Brief – Thursday 10/25/18

If there was ever a day the stock market needed to rally, then today is that day. With the major indices giving up their gains for the year and all below their 200-day moving averages, a bearish signal, leveraged investors likely received delinquency notices from their brokerage firms last night. A delinquency notice, or margin call, gives investors 24 hours to satisfy their delinquency.

Rather than prepare for such a notice, retail investors plowed $4 billion into the two largest S&P 500 ETFs yesterday. There are several ways to deal with a margin call: add cash to your account, sell shares or hope the market goes up enough the following day. Investors in this position will hold out until a couple hours before markets close to see if they need to sell or not.

Pending home sales fell for the fifth straight month and are now down -3.4% on a year-over-year basis. While investors believe interest rates need to rise, the housing market is indicating it is about to implode as we head into what are normally weak months for housing sales. With housing driving credit growth, any weakness here means the deceleration of the money supply will continue.

The trade deficit widened to the lowest since July 2008, when we were knee deep in a recession. Durable goods orders were up +0.8% MoM but were only up +0.1% MoM after stripping out defense spending.

Today’s $31 billion 7-year Treasury auction saw a strong showing from foreign bidders who took 64.6% of the auction. The Fed unwound just under $24 billion of Treasuries, falling just short of their monthly cap of $30 billion. The Fed didn’t have enough maturing Treasuries this month to reach their cap, but they will have no problems hitting their cap in the months that come. Not see in this auction is the first round of $20 billion in Mortgage-Backed Securities that should have also been sold today.

Normally on Fed redemption days the stock market and Treasury yields fall. With $4 billion dumped in yesterday, the market found legs. What I find notable are the last 30 minutes where the market dropped from its highs, which is usually when the “Smart Money” does its selling. Despite today’s bounce, all major indices remain below their 200-day moving averages.

Treasury yields were up slightly on the day as higher interest rates are rapidly slowing down the economy now that the fiscal stimulus from the tax cut has passed through the economy.

Alphabet (Google) and Amazon posted quarterly earnings after market close and both stocks moved down. Just as investors celebrate today’s move, two of the biggest stocks in the indices just shot straight down in after-hours trading.

Physical gold finally made it over its 100-day moving average, which has been a major headwind for a couple weeks now. Last night several gold mining companies posted earnings which were rather positive, but investors dumped their gold mining stocks today. This is setting up a confirmation of the recent bottoming pattern in the mining space. A hold here would support a move back in.

Agricultural commodities dipped slightly today but remain over their 100-day moving average. Trading volume remains light, which is an indication there aren’t many sellers left in this space. With its 50-day moving average curving up, this sector remains positioned to rally.