U.S. equities alternated between gains and losses Tuesday as traders returned after the long holiday weekend.
Futures had initially rallied overnight on weak gross domestic product data out of China, raising expectations of fresh stimulus measures. That exuberance faded mid-day before the China Securities Journal said the People’s Bank of China should cut the reserve requirement ratio in addition to increasing its fiscal deficit target. That reinvigorated the China stimulus theme and pushed large-cap stocks into the green.
In the end, the Dow Jones Industrial Average gained 0.2%, the S&P 500 went up 0.1%, the Nasdaq Composite jumped 0.3% and the Russell 2000 dropped 1.3% to push deeper into a new bear market (closing under the 1,000 level for the first time since 2013). But the ADX indicator (shown below) has flashed a buy signal.
Treasury bonds were weaker, the dollar was up slightly, gold declined and crude oil lost another 3.4% to close at $28.41 a barrel. The IEA reiterated that the global oil oversupply will continue at least through the end of the year.
Defensive utility stocks led the way with a 1.5% gain, while energy stocks, no surprise, were the laggards down 2.2% as a group. Burger joint Shake Shack Inc (NYSE:SHAK) gained 4.5% after being upgraded by analysts at William Blair on valuation and strong earnings growth. Best Buy Co Inc (NYSE:BBY) lost 4.6% after being downgraded by analysts at Morgan Stanley on a lackluster 2016 story from a dearth of exciting new products needed to drive customer visits.
Morgan Stanley (NYSE:MS) reported strong results, beating both the top- and bottom-line estimates. Bank of America Corp (NYSE:BAC) had mixed results as management cited a 2% overall loan book exposure to the energy industry.
After the close, Netflix, Inc. (NASDAQ:NFLX) reported better-than-expected earnings of 10 cents per share (vs. the three cents expected) on slightly weak revenues. Total streaming user additions totaled 5.6 million vs. 3.6 million last quarter and the 5.2 million expected. Domestic adds were slightly weaker than the consensus estimate, however. Management touted the increasing adoption of its Ultra High Definition content, helping push shares up 6.7% in after-hours trading.
International Business Machines Corp. (NYSE:IBM) reported strong earnings but weak revenues on a slowdown in software sales and a drag from the strong dollar.
Back to China. Fourth-quarter GDP grew 6.8% over the past year, down from the 6.9% rate in the third quarter and just under the consensus estimate. Overall, 2015 growth was 6.9%, the weakest pace in 25 years. Capital Economics believes the actual number is probably closer to 4.5% given the communists in Beijing are widely believed to massage their data for social stability reasons.
Electrical output dropped 3.7%. Industrial production growth was softer than expected. And fixed-asset investment growth fell to 10% year-over-year and down from the 10.2% growth seen in the first 11 months of the year. Retail sales were softer as well.
By multiple technical measures, stocks have become extremely oversold and prone to a dead-cat, short-covering rebound. The percentage of S&P 500 stocks in uptrends has returned to its August low. The ratio of activity in equity puts vs. calls has surged to heights not seen since the 2008 financial crisis. And the selling pressure has grown less intense as fewer and fewer issues participate to the downside.
After playing the short side with a number of put option picks, including upward of a 515% gain in the Jan $17 Bank of America puts for Edge Pro subscribers, I think now’s the time to go bottom feeding in anticipation of a violent, short-covering rebound.
New position recommendations include the Feb $60 Nike Inc (NYSE:NKE) calls after shares tested their 200-day moving average as the stochastic indicator rounds up out of the deepest oversold level since early 2014. The good news: The long-term uptrend channel in place since late 2012 remains intact.
The stock enjoyed a price target upgrade from Argus a few weeks ago on worldwide store growth, new footwear introduction and increased market share. They added their belief the business in China will recover and noted constant currency revenues there grew 28% in the last fiscal quarter.
Past a couple of weeks, however, the selling pressure is likely to return. The latest Bank of America Merrill Lynch Global Fund Manager Survey shows that, while pessimism is rising, we’re not yet at full-on panic levels. Allocation to cash has risen to 38% overweight, the highest level in 43 months to the third-highest level since 2009. Fewer are looking for the dollar’s rise to continue. And more are looking for earnings per share growth to drop than at any time since October 2012.
But just 12% of respondents believe a recession will occur in the next 12 months and the vast majority remain overweight stocks. I think these folks are headed for disappointment as 2016 rolls on.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
