Trading Places with Tom Bowley

"How The Grinch Stole Christmas" Featuring Jerome Powell

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Market Recap for Friday, December 21, 2018

Growth stocks remain under significant pressure as the stock market is quickly repricing them based on bear market rules.  While I believe the sudden drop in so many critical areas simultaneously told us of the impending S&P 500 breakdown and ensuing bear market, Fed Chair Jerome Powell hastened the process by essentially guaranteeing the slowdown with a hawkish tone.  For those of you my age (or older), you'll probably remember that old margarine commercial tagline "it's not nice to fool Mother Nature".  Well, it's not nice to fool Wall Street either.  There won't be two rate hikes in 2019.  There won't be any rate hikes in 2019, in my opinion.  I don't know who Powell thought he was kidding.  Billions and billions of dollars have been bet on a significant economic slowdown, perhaps even a recession.  The Grinch, errrrrrrrr Fed Chair Powell, was in a bubble during the last FOMC meeting, cut off from reality.  Well, Wall Street is now showing Mr. Powell reality.


Internet stocks ($DJUSNS, -4.29%) resumed their slide, breaking down once again as former fan favorites Facebook (FB, -6.33%) and Twitter (TWTR, -6.76%) tumbled.  TWTR, in particular, illustrates the danger of a stock that's building solid momentum.....only to run into major overhead gap resistance:

Because of internet weakness, communication services (XLC, -3.27%) was the worst performing sector.  But there was plenty of competition for that bottom spot as technology (XLK, -3.04%), consumer discretionary (XLY, -2.27%) and financials (XLF, -2.00%) all performed poorly.

Pre-Market Action

We're beginning the final week of 2018 on the same note we ended last week.  Asian markets were mostly lower overnight, as are the European markets this morning.  Crude oil ($WTIC) is down another 1.5% and is now below $45 per barrel.  Gold ($GOLD), the safe haven, is up $7 per ounce to $1265.

Dow Jones futures are pointing to a lower open, down 115 points with 30 minutes left to the opening bell.

Current Outlook

This will be a very unusual holiday season on Wall Street.  The last time we entered Christmas Eve trading with a Volatility Index at or near 30 was.......never!  Prior to this year, the worst December on the S&P 500 since 1950 was 2002, when our benchmark lost 6.03%.  The VIX was approximately 26 on Christmas Eve that year and the S&P 500 failed to rally in the week after Christmas and before New Year's.

We don't see VIX readings in the 30s very often, but when we do, it typically leads to a significant short-term rally.  Before we see that rally, however, we'll likely need to feel more pain and perhaps even a VIX in the mid- to upper-30s.  If you've built up a lot of cash, there will be a serious opportunity on the long side during the next rally, but timing entry will be critical.  Check out this chart:

There's one big difference between this volatility spike and the others, however.  This one marks the beginning of a bear market where fear becomes the norm, not the exception.  As a result, we could see a much higher VIX reading to mark the short-term bottom, possibly even in the 40s or higher.

Sector/Industry Watch

There were plenty of weak industry groups last week to choose from in order to feature here, but I'll go with gambling stocks ($DJUSCA), which tumbled more than 13%.  The group had opened December with a PPO centerline reset as price resistance was tested (red arrows), before swiftly accelerating to the downside once again, losing price support on heavy volume:

While gambling stocks are oversold and due for a bounce, the 640-650 range will likely be difficult to negotiate.

Historical Tendencies

Our major indices remain under significant selling pressure as the latest bear market takes hold, but Christmas Eve is typically a strong market day.  Since 1950, the S&P 500 has risen 23 times and fallen 14, producing an annualized return of +45.87%.  The bullishness continues into the week after Christmas with the S&P 500 rising 31 out of 38 times on December 26th since 1950.  The annualized return that day is a whopping +97.19%.

Key Earnings Reports

None

Key Economic Reports

None

Happy trading!

Tom

Tom Bowley
About the author: co-founded Invested Central and served as the site's Chief Market Strategist for more than 10 years. His unique trading style combines both his fundamental and technical strategies to systematically manage risk while trading. A regular contributor to StockCharts.com's bi-weekly ChartWatchers newsletter since 2006, Tom's role at StockCharts has expanded significantly since he joined the company as a full-time Senior Technical Analyst in March of 2015. Learn More
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