Market Brief – Friday 12/28/18

In overnight trading, foreign markets followed US markets higher, which gave an early boost to US equities to start out the trading day. Treasury yields rose in overnight trading, but quickly reversed, and are back where they were in April 2017.

Credit spreads or the difference between high yield and investment-grade bond yields are rapidly rising. Since corporations have been borrowing money to buy their shares back, rising credit spreads are raising borrowing costs for corporations. Rising credit spreads may lower the estimated amount of share buybacks next year.

Pending home sales experienced their largest drop in four years as sales fell -7.7% on a year-over-year basis. Home sales are a large currency generator in our economy, as most buyers borrow to purchase a home. As new currency is borrowed, the money supply and economy expands. Slower and lower home sales is not an indication of an expanding economy.

While the New York and Richmond Fed showed a negative print earlier this week, the Chicago Fed’s factory gauge remains near its all-time highs.

After last night’s API numbers, traders were concerned about rising crude inventories going into today’s EIA numbers. The Department of Energy reported: Crude +46k (+3.4mm exp); Cushing +799k; Gasoline +3.003mm (+1.0mm exp); and Distillates +2k. Oil traded slightly lower following the report.

Shortly after 10:30 am PST, the second largest buy order in the history of the NYSE came in, presumably to front-run pension fund rebalancing. Stock prices shot up in response. Either this person has knowledge of a large late-day reallocation or they are hoping for a repeat of the prior two trading days.

Whomever this large trader was, they attempted to fake out retail investors and the computer algorithms, which they successfully did. This trader didn’t fool anyone else since bonds didn’t sell off. When pension funds rebalance, they buy or sell stocks to buy or sell bonds. In this case, they would need to sell bonds to buy stocks, which didn’t happen today. Once the market figured this out, stock prices headed lower.

Treasury yields closed lower with 10-year Treasuries breaking another key support level. Today’s move is opening the floodgates for yields to fall and bond prices to rise. 10-year Treasuries closed at 2.17%, matching their April 2017 low.

Physical gold continues to march higher, but the gold miners aren’t following suit. The gold miners have run into stiff resistance, suggesting they will need to fall before making another run at breaking resistance. Physical gold should follow suit.

While the news for agricultural commodities could hardly be worse, they continue to hold their six-month lows for the fourth time. The longer prices hold this level, the more likely they are to rise on any form of good news. This sector is one of the most shorted sectors in the market, leaving a huge opportunity for this sector to go higher.