While the U.S. equity markets, until the last few days, seemed unconcerned about the prospects of the rate hike, the so called canaries in the coal mine are once again sending troubling signals, as the consequences of a reversal of Fed policy after 7 years of crisis management are significant, and the stresses are amplified as policy change looks likely to occur while most other central banks are taking the opposite monetary policy tact.
Bonds are back in town and stocks are tumbling. Dow Transports remain the worst performer of the major indices (down over 11% year-to-date), but, after the exuberance of October, November's reality of a tightening Fed has dragged first Small Caps, then The Dow, and now The S&P into negative territory for 2015. Only Nasdaq remains in the green (up a stunning and entirely unsustainable 10% YTD). The S&P 500 also broke below its 200-day moving average.
The biggest event overnight came from Europe, where Draghi managed to once again jawbone the Euro lower by ober 50 pips when he told European lawmakers in a prepared testimony that downside economic risks are "clearly visible," repeating his October press conference statement, adding that the ECB will reexamine degree of accommodation in December as "inflation dynamics have somewhat weakened." And the statement that crushed the Euro: "If we were to conclude that our medium-term price stability objective is at risk, we would act by using all the instruments available within our mandate to ensure that an appropriate degree of monetary accommodation is maintained." I.e., another "whatever it takes" moment.
The PBOC weakened the Yuan fix for the 7th straight day - the longest such streak of 'devaluation' since 2012 - which appears to have helped fuel yet another day of gains for China's most-levered Shenzhen and ChiNext stock indices (even though the USDollar is losing altitude against Asian FX). At the break we note that the lower beta CSI-300 and Shanghai Composite are diverging lower. Meanwhile, over in real economy land, Copper is hitting new lows, nickel is weak, zinc is down, and China Containerized Freight Index just hit a new record low... but when has any of that ever mattered?
As Strategas notes "any way we look at it, market breadth remains narrow," but, as Dana Lyon's details, everyone's favorite high-beta squeeze index - Nasdaq - is perhaps the most troubling. Since the initial spike off the September lows, rally participation among all stocks has been lackluster; the Nasdaq provides us with more evidence of this... In fact, over the past month, the cumulative number of daily advancing stocks minus declining stocks on the Nasdaq is actually negative.
The world is bankrupt after thirty years of borrowing from the future to throw a party in the present, and the authorities can’t acknowledge that. But they can provide the conditions for disguising it, especially in the statistical hall of mirrors that once-upon-a-time produced meaningful signals for the movement of capital. The Dow, the S&P, and the NASDAQ are the only signaling mechanisms that the legacy media pays attention to, and the politicos take their cues from them, in a feedback loop of false information that begets more delusional positive psychology in those same markets.
As DB so well-puts it, "Welcome to random number generator day also known as US payrolls." Consensus expects 185k jobs to have been added in October but it’s fair to say that the whisper number has edged up this week with slightly firmer US data. It is also fair to say that even if one knew the number beforehand, it would be impossible to know how the market will react.
The last time The Nasdaq was this overbought, the index peaked and dropped 7% in the next week. With 'Greed' near 2015 highs, perhaps the decoupling of VIX from stocks suggests many have similar ideas of hedging these exuberant gains.
So far today's trading session has been a repeat of what happened overnight on Monday, when following a weak start on even more weak Chinese data, US equities soared on the first trading day of the month continuing their blistering surge since that dreadful September payrolls report, which as we showed was mostly catalyzed by a near record bout of short's being squeezed and covering, which accelerated just as the S&P broke the 2100 level.
As Nasdaq 100 surges above July 2015 cycle highs towards 2000 record highs and the S&P 500 breaks the key 2,100 level - erasing all the losses from August 11th's start of China's devaluation, global markets in turmoil collapse - on ever-decreasing volume, it appears the credit market 'changed its mind' after Europe closed. What happens next?
If one looks at the NDX alone, one would have to conclude that the bull market is perfectly intact. The same is true of selected sub-sectors, but more and more sectors or stocks within sectors are waving good-bye to the rally. Even NDX and Nasdaq Composite have begun to diverge of late, underscoring the extreme concentration in big cap names. Naturally, divergences can be “repaired”, and internals can always improve. The reality is however that we have been able to observe weakening internals and negative divergences for a very long time by now, and they sure haven’t improved so far. In terms of probabilities, history suggests that it is more likely that the big caps will eventually succumb as well.
On a day full of Manufacturing/PMI surveys from around the globe, the numbers everyone was looking at came out of China, where first the official, NBS PMI data disappointed after missing Mfg PMI expectations (3rd month in a row of contraction), with the Non-mfg PMI sliding to the lowest since 2008, however this was promptly "corrected" after the other Caixin manufacturing PMI soared to 48.3 in October from 47.2 in September - the biggest monthly rise of 2015 - and far better than the median estimate of 47.6, once again leading to the usual questions about China's Schrodinger economy, first defined here, which is continues to expand and contract at the same time.