There are no two ways about it: The bearish reversal in stocks on Thursday and Friday was brutal. After a brief bounce on Wednesday following the Federal Reserve’s first interest rate hike in more than nine years, the downward pressure on stocks was severe. The selling wiped out the week’s gains and resulted in a marginally lower weekly close for the benchmark S&P 500 index.
The question now is whether Santa will come to the rescue because an attempt at new highs is needed fast or else we could see a real washout in early 2016.
The weakness in the latter part of the week was due in part to a very large quadruple witching expiration — one of the largest in years. I expect the expiration hangover to linger today as option traders reposition their books.
Another reason for last week’s weakness in stocks was that fund managers continued to sell down losing positions for tax-loss and window-dressing purposes.
The beaten-down energy sector closed Friday at new lows for the year. Oil continued to drop amid large inventories and warm temperatures across the United States and Europe that have quashed the typical seasonal surge in demand. I’ll take a closer look at energy in a moment.
Economic growth has been slowing for a good part of 2015, and this has manifested into some concerning signs on the charts.
For instance, over the past 12 months, Goldman Sachs Group Inc (GS) traced out a bearish head-and-shoulders pattern.
It is entirely possible — in fact, expected based on the pattern — for the stock to bounce one more time before breaking below the horizontal line. Through a three-to-six-month lens, however, this is a concerning pattern that is mirrored on many other charts.
Despite all of these negatives, the bulls could still see seasonal tailwinds come to the rescue. The typical December pattern for U.S. stocks is clear — weakness into the middle of the month followed by a strong rally into year end. Ture, it doesn’t always happen that way, but historically speaking, stocks get a bid in the second half of the month and into January/February.
The S&P 500 closed Friday near the 2,000 mark, which is horizontal support (previous resistance) and represents a 50% retracement of the September to early November rally. Bulls must hold this area or things could get much uglier, much quicker.
The bulls will also point to the CBOE Options Index Put/Call Ratio, which shows a sharp rise last week. This typically signals selling in stocks is overdone in the near term.
If stocks stand a chance of a rally into year end and early 2016, then oil and energy-related stocks must bounce.
The Energy Select Sector SPDR (ETF) (XLE) broke to new year-to-date lows Friday and is once again getting extended on the downside. From a momentum perspective, XLE is still making higher lows, so I can envision a further marginal sell-off followed by a sharp snapback rally.
Traders should watch oil and the energy sector closely in the coming week. A sustainable bid, if only for a few weeks, could do wonders to support stocks. Absent a bid in the energy sector, stocks will likely continue to feel heavy.
The good news is that once fund managers are done dumping all of their losing energy stock positions for tax-loss reasons, sellers may finally get exhausted and buyers could take over for a while.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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As of this writing, Serge did not hold a position in any of the aforementioned securities.
