Market Direction Week of December 10, 2018©

Market Direction:BEARISH alert issued 11/23/2018 

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Last Week Review: High volatility was the prevailing theme this week with trade uncertainty and worries about a flattening yield curve at center stage. Stocks finished lower, but bonds had their best weekly performance since May as investors fled for safety. The week started on a strong note after the U.S. and China agreed at the G20 summit to ceasefire and not to impose any additional tariffs for 90 days as they negotiate an agreement. The initial optimism later turned sour as investors realized that no substantive agreement was reached and a quick resolution is far from guaranteed. Adding to the uncertainty, news that a Chinese tech company's CFO was arrested in Canada on allegations of violating U.S. trade sanctions further complicated matters. The other key issue that unnerved investors was the U.S. Treasury curve as the 3-year rates exceeded 5-year rates, raising fears of an inverted yield curve and the belief that it's signaling a downturn ahead. While we are not dismissive of the risks, we think that such predictions are premature. A more reliable measure to monitor is short-rates (3-month) compared to 10-year rates. This yield curve is flatter, but is still positively-sloped, not inverted. Finally, the action-packed week ended with an OPEC agreement to cut oil production and Novembers' job report which showed slowing job gains, but strong enough to maintain record low unemployment rate without signs of an overheating economy.

When it comes to the market, there are typically two sides to every coin. At times, one side can be much shinier than the other, or one side can turn up rather consistently for stretches of time. And then there are times when both sides – the good and the bad news – compete for the market's eye with every flip.

Trade, interest rates and jobs were all front and center last week, with each issue offering two sides of the story. The outcome was wide market swings, including

• A Monday rally on hopes of a trade deal,
• An 800-point drop in the Dow on Tuesday on yield curve worries and
• A 689-point swing from the low to the high on Thursday.

How the market finished last week, the S&P 500 down 4.6%, the Nasdaq down 4.9%, and the Dow drop 4.5%.

This Week: Key events for the week include UK gross domestic product (GDP), an European Central Bank (ECB) rate decision and flash purchasing managers index's (PMIs) from the eurozone, but the main event will be the UK Parliament vote on the Brexit withdrawal agreement, still expected for Tuesday.

Heightened uncertainty translates into heightened volatility, which is likely to persist next week – consider a cautious stance.  

For reference, the probability of a December hike has dropped another 3 ticks to 69% since I mentioned it above. Heading into next week, I just think that there are too many issues for investors to grapple with (trade relations, rising interest rates and an upcoming FOMC meeting, inverted yield curve, Brexit vote, etc.) to reverse the recent market downdraft and suggest caution in the near-term.

Company news is relatively light, but retailers such as Dixons Carphone and Ocado, plus housebuilder Bellway and tobacco firm British American Tobacco will be key names to watch.

Economic Calendar: JOLTS (12/10), PPI (12/11), CPI (12/12), Export and Import Prices (12/13), Retail Prices (12/14)

Some of the major earnings announcements on deck: AEO, SFIX, PLAY, ADBE, COST. 

$tockMarketDirection proprietary model is currently BEARISH. We strongly encourage you to monitor positions closely, exercise proper money management strategies and follow us at $tockMarketDirection for ALERTS we may issue advising a change in the current market direction. Stay tuned and follow us. If you have a testimonial or comment of how this website has helped you we would like to know, email us. Share with a friend. Cha-ching.

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