Market Brief – Thursday 11/15/18

With volatility about to explode higher, it was all hands on deck to buy stocks in early trading. Retail sales came in at +0.8% MoM, but when stripping out energy, it was only up +0.3% MoM. The prior two months were both revised down to -0.1% MoM, which suggests the tax cut has not benefited the average American household very much.

The EIA reported a massive crude oil inventory build of +10.72 million barrels for the week, but with refinery maintenance season coming to an end, speculators immediately began bidding back up the price of oil. Many hedge funds have taken a beating over the recent fall in oil prices, as hedge-fund managers have been very bullish on oil. Today’s bounce could be hedge fund managers buying in an attempt to recover some of their recent losses.

Fed Chairman Jerome Powell mentioned he was concerned about the global slowdown, but nothing in his speech yesterday indicated any change to the expected rate hike next month. Further monetary tightening will lead to slower global growth.

Yesterday the head of UBS’s quant division warned that its quant computer model that manages $2.4 trillion could deleverage from a 50% equity exposure to a 20% equity exposure in the near future, which would equate to $72 billion of selling. Due to the secrecy behind the formulas these machines trade, UBS didn’t specify what the trigger point was. The fact they mentioned this should be a warning to stock investors that more selling is coming if stock prices continue to fall.

Markets moved higher on rumors the next round of tariffs are on hold, but the markets have been whipsawed lately on conflicting trade-war news from both China and the U.S. Two hours later Wilbur Ross confirmed plans to increase the tariffs to 25% in January. Stocks initially sold on this news, then rallied back as if nothing happened.

Today was a day of support and resistance checks. All major indices showed big upward moves today. The S&P 500 has overhead resistance at 2,735, where sellers have been selling. Buyers hoped to break through but were unable to by market close. The DJIA tested its resistance level at 25,330 and ran into sellers. Buyers will need to overcome resistance, otherwise, a retest of the one-year lows are coming.

Ten-year Treasury yields broke a 6-month support level at 3.095%, but the bears came in to move yields slightly higher. Ten-year yields closed below their 50-day moving average. Those who have been short Treasuries from 3.095% are in a loss position, so it is up to the Treasury bears to defend this support level. Failure to defend indicates yields will fall to their next support level at 3%.

The M2 Money Supply fell to 3.72% YoY and is once again just above the 5th quintile at 3.7% where the economy experiences recessions and depressions. Both the 3- and 6-month rate of change turned sharply lower, indicating the year-over-year growth rate should continue to fall.