Trading Places with Tom Bowley

On Fed Day, The Treasury Market Is Painting A Bearish Picture

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Special Event

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Market Recap for Tuesday, December 18, 2018

Real estate (XLRE, +0.99%) bounced back to lead a tepid Wall Street rally on Tuesday.  Last minute selling pushed the small cap Russell 2000 to a fractional loss, but the other major indices held onto gains with the Dow Jones, S&P 500 and NASDAQ climbing 0.35%, 0.01% and 0.45%, respectively, at day's end.  Technology (XLK, +0.79%) and consumer discretionary (XLY, +0.78%) also performed well, although recent selling has taken both of these aggressive sectors to the brink of serious breakdowns:

The trend of each sector is down, although bouncing at or near support should be expected.  A violation of major intermediate-term price support without a bounce first would be very damaging technically.

Despite renewed interest in U.S. equities, energy (XLE, -2.36%) was extremely weak and a notable laggard.  Crude oil ($WTIC) extended its collapse from early October, tumbling another 7.17% on Tuesday.  I've featured WTIC in the Sector/Industry Watch section below.

Banks ($DJUSBK, -0.74%) also failed to participate in Tuesday's rebound as the 10 year treasury yield ($TNX) can't seem to find a bottom.  Squeezing net interest margins are the likely culprit for banks, but when is enough...enough?

The PPO tells us the obvious - that price momentum is bearish and accelerating in that direction.  Volume confirms it.  But the RSI is now at 23, which is extremely oversold in the near-term.  I would expect that once we get this Fed announcement out of the way, it's very possible that banks will see a short-term rebound to perhaps test its declining 20 day EMA.

Pre-Market Action

Well, it's Fed day, and perhaps a day of reckoning.  It seems like everyone except the Fed sees an economic slowdown ahead.  I expect the Fed to follow through with the rate hike that it's been telling Wall Street it's getting.  But what will Fed Chair Powell say about 2019?  I think acknowledgement of changing conditions and a move to a more dovish stance would likely result in a very nice bounce, perhaps in the 2-4% range.  But that's where things will get particularly dicey.

Crude oil ($WTIC) is up 1.43% to $46.90 per barrel at last check, partially recovering some of its losses from Tuesday.  Overnight, equities in Asia were mixed, while we're seeing mostly strength in Europe this morning.  That strength is carrying over here in the U.S., with Dow Jones futures higher by 135 points as we approach the opening bell.

Current Outlook

As we approach a very significant Fed day, one in which we'll very likely see another 25 basis point hike, the longer-end of the yield curve continues falling.  I follow closely the direction of the 10 year treasury yield ($TNX) as the positive correlation between the $TNX and S&P 500 is quite apparent:

Correlation coefficient readings above .50 suggest very strong positive correlation, while readings below -.50 are indicative of strong inverse correlation.  From the highlighted areas above, it's obvious that there's a lot more positive correlation between the TNX and SPX than negative, or inverse, correlation.

Based on the above chart, when we look at the absolute chart of the TNX, you can now understand why the precipitous drop in the TNX is so alarming and noteworthy:

The good news is that we're near support so an oversold bounce should be expected at any time.  That could coincide with an equity market bounce as well.  Still, the intermediate-term implications are quite bearish so a total breakdown in the S&P 500 would more than likely result in an ensuing bear market.

Sector/Industry Watch

Crude oil ($WTIC) continues to tumble, dropping another 7.17% on Tuesday.  The good news, however, is that a positive divergence has formed on this latest price low:

Divergences guarantee us nothing at all, but they do provide an indication of slowing price momentum.  I'd look for a reversing candle to confirm a potential short-term price bottom and then look for a rally into an area of price congestion between roughly $50-$54 per barrel.  That would likely intersect a 50 day SMA test as that moving average is at $60 per barrel and falling rapidly.

Historical Tendencies

The 19th calendar day of the month has historically been the most bearish.  It's not just December 19th that I'm referring to, it's the 19th from every month.  The following are the annualized returns for the 19th on each of our major indices:

S&P 500 (since 1950):  -33.44%
NASDAQ (since 1971):  -31.91%
Russell 2000 (since 1987):  -32.34%

Today is December 19th.

Key Earnings Reports

(actual vs. estimate):

GIS:  .85 vs .81

PAYX:  .65 vs .63

(reports after close, estimate provided):

MLHR:  .72

RAD:  (.02)

Key Economic Reports

November existing home sales to be released at 10:00am EST:  5,190,000 (estimate)

FOMC policy statement to be released at 2:00pm EST

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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