Pre-holiday cheer has pushed U.S. equities up nicely this week, with another strong gain on Wednesday heading into the shortened Christmas Eve session Thursday. Trading volumes remain light.
In the end, the Dow Jones Industrial Average gained 1.1%, the S&P 500 gained 1.2%, the Nasdaq Composite gained 0.9%, and the Russell 2000 gained 1.3%. Treasury bonds weakened slightly, the dollar was mixed and oil gained 4.7% to close at $37.85 a barrel.
Energy stocks led the way with a big 4.3% bounce after investors were encouraged by inventory data showing significant drawdowns; with many unaware that energy companies try to reduce tank holdings at year-end for tax reasons.
The API reported crude stockpiles fell by 3.6 million barrels last week vs. the consensus estimate for a 1.1 million build. This morning, the Energy Information Administration reported a 5.9 million barrel inventory drop. Cushing inventories rose by two million barrels, moving closer to estimates working capacity.
It’s worth noting that there was a similar end-of-year surge in crude oil back in 2008 that gave way to fresh lows in February 2009.
On the economic front, ongoing weakness in manufacturing underscored a 0.4% drop in core capital goods orders in November. Core capital shipments were down 0.5%. This was well below expectations.
Technically, things look precarious for stocks despite the Dow’s rebound above its 50-day and 200-day moving averages today. The 20-day moving average has dropped below the 50-day average, a medium-term sell signal last seen back in June.
Measures of market breadth have also been pretty terrible. Stocks remain discounted from the weakness in commodities and high-yield “junk” bonds. And small-cap stocks remain significantly weaker than the large-caps in the Dow.
All of this, alongside fundamental issues like the Federal Reserve’s rate hikes, a drop in corporate earnings and a slowdown in recent economic data suggest stocks should resume their slide after traders return from holiday and the calendar flips into 2016.
For now, enjoy the respite.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
