Stocks mostly finished lower on Tuesday as a mid-day rebound fizzled into the closing bell. Trading remains quiet ahead of the Thanksgiving holiday, giving a sense that the market will hang here until the start of December.
In the end, the Dow Jones Industrial Average, the S&P 500 and the Russell 2000 were each down marginally, while the Nasdaq Composite gained 0.1%.
The S&P 500 closed above its five-day moving average for the 28th consecutive session, breaking the previous record set in 1928. Combined with ongoing long-term persistence (the S&P 500 is working on its 29th consecutive month above its five-month moving average), and the rebound we’ve seen out of the Oct. 15 market low is simply unprecedented.
Something like this has never happened.
When stocks in stasis, focus has shifted to what’s happening with crude oil ahead of Thursday’s OPEC meeting. Oil futures are down more than 32% from their high in June, putting pressure on oil exporters such as Saudi Arabia to cut production to bolster prices. Complicating the situation is the increased reliance oil producers such as Russia have on high energy prices to fund public budgets.
So no one wants to cut production, since that will reduce revenue. But no one wants to see oil prices collapse if action isn’t taken, as is widely expected. Oil was dragged lower in Tuesday’s session on reports that a pre-OPEC meeting of OPEC members Saudi Arabia and Venezuela with non-OPEC countries Russia and Mexico failed to produce any agreement on production cuts. Additional comments from Russia suggested the country wouldn’t be worried if oil fell from $74 now to below $60 a barrel.
Subsequent headlines that Saudi Arabia may support efforts to force OPEC countries to honor current production agreements — as a backwards way of reducing supply — provided merely a short-lived bounce in oil that was fully reversed into the close.
The other big development was the upside breakout in long-term Treasury bonds as the fixed income market continues to send a very different, and much more cautious, signal than stocks are. This came despite an upward revision in Q3 GDP growth to a 3.9% annualized rate vs. the advance estimate of 3.5%. As a result, the iShares 20+ Year Treasury Bond (ETF) (TLT) positioned recommended to Edge subscribers climbed to a 1.2% gain since Friday.
It’s likely that the strength in Treasury bonds, and the weakness in high-yield corporate bonds as well as industrial commodities, reflects nervousness on the part of commodity and fixed-income traders about what’s in store for the markets in December.
The fallout from the GOP’s takeover of the Senate in the mid-term elections earlier this month, as well as President Obama’s inflammatory executive action on immigration, is about to come to a head as Congress needs to pass a budget resolution by Dec. 11 or face another shutdown. We also need to deal with the debt ceiling again in March. Partisan rancor should be expected, something that markets have reacted negatively to over the last few years.
Also, we have another Federal Reserve policy meeting in December that, given the strength in gross domestic product growth and job creation, is likely to bring forward the timing and pace of the Fed’s rate hike schedule in 2015. Investors have been badly lagging the Fed’s own forecasts on this, setting the stage for a “rates rage” as expectations for the end of 0% interest rates are readjusted.
With investor positioning at extremes, sentiment off the charts, stock prices in record territory, and in the midst of a two-month uptrend of a consistency that’s never been seen before, these risks couldn’t be further from the minds of most people.
That’ll change once we get to the other side of Turkey Day.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.
