With the Dow tumbling another 500 yesterday and the Nasdaq plunging more than 2%, Art Cashin and Jeff Gundlach gave their take on the stock market plunge and the trapped Fed.
Stock Market Plunge
December 18 (King World News) – Here is a portion of today’s note from Art Cashin, Head of Floor Operations at UBS: Failed Technical Levels And On Close Sellers Make For A Second Ugly Day – U.S. stocks gapped lower on the opening. Interestingly, the gap was not a long standing market posture. Two hours before the opening, futures looked like they might open in neutral territory. Then about an hour before the opening, futures began to move lower as more people called upon the Fed to not raise rates on Wednesday.
That added to angst that the Fed might be “politically trapped” into raising rates on Wednesday. In short, the feeling is that the Fed would look like it was yielding to the President if it stood pat Wednesday. An additional fear is that a surprise “stand pat” might spook markets with a – what does the Fed see that we didn’t?
At any rate, fears of a looming and likely hike saw stocks gap down slightly on the opening. The selling seemed to dry up within minutes of the opening.
When the opening selling seemed to dry up, some of the “buy the dip” crowd showed up and cut the Dow’s losses by late afternoon. As noon approached, I sent out this note:
Today’s low in the Dow (23785) stayed well above the March low (23533) and that allowed them to bounce.
If they were to trade below 23533, it could raise the issue of a Dow Theory sell signal (see my citation of Jeff Saut in this morning’s Comments).
If we weaken again, the first checkpoint would be 23785.
Sure enough, in early afternoon, stocks rolled over, as DoubleLine’s Jeff Gundlach was on CNBC, saying the Fed should not hike and that U.S. stocks were probably in a bear market.
Around 1:00, they began a retest of the earlier lows at 23785. They tested and retested that level for about twenty minutes.
Once they broke below that level, the selling became a bit more intense.
In the final hour that intensity increased as word spread that there might be over $2 billion for sale on balance at the bell.
The Dow broke below the 23533 level and for a few brief moments it looked like we might shift into freefall mode.
Luckily some of the indicated selling for the close was either canceled or offset. That invited buyers in the final 10 minutes, which allowed the Dow to close above that 23533 level and avoid, for now, a Dow Theory sell signal.
The Gundlach Concern – Here’s a bit of the Gundlach interview from the CNBC website:
DoubleLine Capital founder and CEO Jeffrey Gundlach said Monday that the Federal Reserve should not hike rates at its December meeting later this week.
“I think they shouldn’t raise them this week. The bond market is basically saying, ‘Fed you’ve got no way you should be raising interest rates.’ Look at the twos, threes, five-year part of the yield curve, which are flat at 2.7 percent,” Gundlach told CNBC’s Scott Wapner in Los Angeles. “The problem though isn’t that the Fed shouldn’t be raising rates. The problem is that the Fed shouldn’t have kept them so low for so long.”
The Federal Open Market Committee — the Fed’s policymaking arm — is expected to hike its benchmark overnight lending rate for a fourth and final time of 2018 on Wednesday. While fears of rising interest rates and an ambitious Fed have spooked markets throughout 2018, such concerns have evolved over the past month as inflation and growth expectations recede.
“The problem is that we shouldn’t have had negative interest rates like we still have in Europe. We shouldn’t have done quantitative easing, which is a circular financing scheme,” he added. “The problem really is the deficit. The Fed is kind of helpless here. The fact that the deficit is so out of control this late in the economic cycle: We have never before had the Fed raise interest rates while the budget deficit was expanding.”
Overnight And Overseas – Asia markets traded lower yesterday partly in reaction to the two day drubbing in New York and partly in reaction to the key speech by President Xi (which some of the press deemed “Defiant”).
The dollar is trading lower as probability of a Wednesday hike slips below 70%. Crude continues lower but energy stocks are not getting whacked. Stocks in Europe are fractionally lower.
Consensus – The bounce-back appears to be holding pre-opening despite further weakness in crude.
Rally resistance most likely around the Dow 23785 level or 23840.
Stick with the drill – stay wary, alert and very, very nimble.
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