Yesterday was the third consecutive decline for the S&P 500 (SPX). A rare occurrence in 2015. And there was some fairly interesting price action in yesterday’s session, across asset classes. First and foremost, the 2% intra-day reversal. And that the SPX crossed and closed below its 200 and 50 day moving averages in the same session. The last time it did that was August 19th:
Crude Oil has been the source of a ton of volatility, effecting multiple asset classes, and the SPX’s reversal was correlated to oil’s nearly 5% reversal from its early highs (after what was seemingly positive supply data.) Despite oil closing near multi-year lows, shares of integrated oil companies and drillers caught a bid with the XLE (Energy Select etf that is nearly 40% XOM, CVX & SLB), bouncing off of key technical support:
Last night on CNBC’s Fast Money program our guest was Evercore ISI’s chartist Rich Ross. He detailed his thoughts that on a long term basis, the XLE is sitting on precarious technical support, at the uptrend from its 2002 lows, and he sees lower lows in 2016:
And then there’s the US dollar, the early oil strength made sense yesterday with the US dollar’s weakness, down more than 1% for most of the session vs the Euro, but bouncing a bit this morning. What’s interesting about this move is that it is unexpected in the lead up to what the Fed Funds futures are saying is an 80% probability that the US Fed will raise interest rates off of zero for the first time since June 2006. The Dollar vs Euro bounced in the last 24 hours off of its 200 day moving average (yellow line below), and was rejected last week at the breakout level. At least for the near term, we have a well defined range:
And despite the high probability of a rate increase, the yield on the 10 year US Treasury is down 10 bps this week:
What’s it all mean? Who knows, but one thing is certain is that volatility is picking up across risk assets in a way we have not seen since Aug/Sept. This is in front of a highly anticipated FOMC meeting next week. My take on the US dollar move in the last week is that it is the best possible set up for the Fed’s end to ZIRP, as it gives them the cover to do something they don’t really want to do, but it serves as a little bit of a buffer in the near term so that their impending rate increase does not cause the breakout to new highs. There are some that would argue that crude oil’s 11% decline month to date may give the Fed cover NOT to raise next week, but then they risk losing credibility.
I would argue an abrupt about face to the Fed Chair’s commentary last week would be VERY bad for US stocks, similar to their dovish talk after the Sept FOMC meeting when they pushed out the liftoff. But the lower stocks go into the event, the more likely they are to rally out of it. I am not expecting the US stock market to fall apart between now and year end. That will be a 2016 thing.