The market took it on the jaw yesterday, but there wasn’t a sense of panic, and many think that's a red flag. Those same observers have been hoping for and predicting capitulation for months, but I think there is a problem. Boredom meets complacency.

All the crucial economic data for the month is out, and the most critical releases this week are on Friday. As a result, investors aren't sure what they should be doing. There is a saying about not shorting a boring market, but that’s not always true; it just means don't confuse boredom with weakness. 

By the same token, don't confuse complacency with cockiness. I bring this up because the CBOE Volatility Index (VIX), the so-called fear index, had been down 32 of the last 37 days - a remarkable feat that seems like more than whistling past a graveyard. Investors have been skipping. Yesterday was the biggest move higher since September 26th. 

Wall Street bears must be happy, but they have long said the VIX would go to 40 minimum or maybe 90 maximum. It could still happen, but I’m not betting on it. Meanwhile, the VIX yesterday was more along the lines of the boredom index than the fear index. However, anxiety crept into the picture as well.

VIX One-day

Service Economy Too Hot?

The Service Purchasing Managers’ Index (PMI) is ripping as the Manufacturing Purchasing Managers’ Index (PMI) slumps into contraction. Service business activity erupted, and other components remain above expansion.  Prices also remain extremely elevated. Service employment moved back to expansion.

Fed Watch

The report was strong enough to nudge CME FedWatch to 500-525 basis points (bps), shifting the February hike to 50-bps from 25-bps. Still, the Street sees a brief pause turning in rate cuts in the fall and winter of 2023.

Heat Map

Every sector was down in the session, with Energy (XLE) taking the biggest spill.

It was a sea of red as 93% of the names in the S&P 500 finished in the loss column. There were just a few specks of green. 

Rough Day but Best Fourth Quarter

• S&P 500 (SPX) -179%
• Nasdaq-100 (NDX) -1.73%
• Russell 2000 (RUT) -2.78%
• Dow Jones Industrial (DJI) -1.40%

Coming into the week, the market was enjoying its best fourth-quarter gain since 1999 but not a great start to the week.

Bond yields edged higher, but the downtrend is well intact. It’s a nailbiter.

Bank Shot

It’s a serious red flag with banks as the SPDR S&P Bank (KBE) swooned 4.7%, smashing below key moving averages. Relativity strength and the Moving Average Convergence/Divergence (MACD) suggest more to the downside, and the next big support point is down at 44.0.

The Financial Sector (XLF) is faring better than the big banks underscoring different potential opportunities in financials.

More data today, but Friday will see data releases that could move the market.

Portfolio Approach

There are no sector weighting changes in our Hotline Model Portfolio this morning.  We did add back several positions to the Current Buy list that had been suspended. If you are not a current subscriber to our Premium Hotline service, email Info@wstreeet.com to get started today. 

Today’s Session

The trade gap widened more than anticipated to $78.2 billion in October. Interestingly, declines where in toys, games and sporting goods.  Exports were at lowest value since May.

Trade Balance

 

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