Summary:
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All major US indices in the red ahead of Wall St. open
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US30 pulls back from record peak
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Weekly initial jobless claims falls to 207k
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How costly is it to be early in calling tops?
The concerns surrounding a breakout in US yields has made some stock investors seemingly worried with some sizable selling seen in the US500, US100 and US30 after the TNOTE fell to its lowest level since 2011. Wednesday’s session began well for these markets as they rallied higher from the opening bell with the US30 the standout performer and making a new all-time high within an hour of the cash session starting. However, rather than embarking on a breakout rally to the upside the move faltered and ended the day little changed with the cash session actually ending lower than where it began.
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The US30 rallied not long after the opening bell yesterday and surged to a new record peak of 26960. However, this move faded and the market subsequently fell back. Source: xStation
With the recent moves in yields, the ongoing trade dispute with China, the poor performance of European markets and the crises surrounding the Emerging Markets space there’s plenty of reasons for calling a top in the US. Many traders know that standing in front of a runaway market isn’t a wise move and therefore they look for possible technical reversal signals which support their fundamental bias. Wednesday’s declines later session may well have thrown up one of these with an inverted hammer of sorts printed on the D1 chart. As long as price doesn’t breach 26960 to the upside then this signal remains valid and given the recent gains there’s plenty of scope for a move to the downside.
On the data front today the only real number of note was the weekly initial jobless claims which further supports yesterday’s ADP in suggesting that the US labour market continues to strengthen. The release fell to 207k from 215k last time out, below the 214k expected. This is the 4th time in 5 weeks that this metric has beaten forecasts and may well raise expectations ahead of Friday’s NFP report.
Given the move we’ve seen in bonds of late there is the sense that something bigger could be brewing and if we look back to start of the year we can recall how an NFP release sent stocks tumbling. The February release showed a solid 200k jobs added and the prior revised higher by 12k, but the real story was average earnings which surprised to the upside (+0.3% M/M vs +0.4% prior - revised up from 0.3%) and raised fears of the Fed getting behind the curve and needing to tighten faster than was expected. Several NFPs have occurred since then without anywhere near the same reaction but if there’s some better than expected data and US yields spike higher (TNOTE falls) then stocks could well look more than a little vulnerable.
The US30 could be reversing ahead of tomorrow’s NFP and a strong number may threaten the recent gains for this market. Source: xStation
Having said that it is worth pointing out that even if the market is close to topping out, being early is the same as being wrong. As JP Morgan Asset Management point out in the chart below being too early to short before the peak will not only see traders lose on their shorts, but they also will miss out on the final push higher which is often quite sizable. The average return leading up to equity market peaks for the S&P 500 (US500 on xStation) is 15% for the 6 months beforehand and still 8% for the 3 months prior.
Being early in calling tops for US equities has been an expensive mistake with the markets often showing strong gains shortly before peaking. Source: FactSet, Robert Shiller, JP Morgan Asset Management.
