U.S. equities moved lower on Friday as the bulls just didn’t have enough gusto to get the Dow Jones Industrial Average over the 20,000 level — a threshold that has been teased all week long. It was a relatively mild end to a quadruple witching day, with December market index futures, market index options, stock option and stock futures all expiring.
Investors continued to digest big rallies in the dollar and a rise in interest rates following Wednesday’s Federal Reserve interest rate hike.
In the end, the Dow Jones Industrial Average lost 0.1%, the S&P 500 fell 0.2%, the Nasdaq Composite lost 0.4% and the Russell 2000 ended the day 0.2% lower. Treasury bonds were mostly stronger, the dollar was weaker after hitting a 14-year high earlier in the week, gold gained 0.7% to recover from Thursday’s selloff, and crude oil gained 2%.
Still, Treasury bond ETFs weakened which pushed the ProShares UltraShort Treasury 20+ Yr(ETF) (NYSEARCA:TBT) recommended to Edge subscribers to a 35% gain since recommended in August.
Yield-sensitive stocks rallied on the rate relief, with utilities up 1.2%, REITs up 1.2% and telecoms up 0.6%. Energy stocks added 0.6%. General Electric Company (NYSE:GE) gained 1.6% thanks to an upgrade by analysts at Bernstein noting consistent earnings growth, improved portfolio outlook and reduced restructuring concerns. Eli Lilly and Co (NYSE:LLY) gained 2.7% thanks to an update from Morgan Stanley on low risk to management guidance and new production momentum.
Financial and technology stocks were the laggards, down 0.9% and 0.8%, respectively. Nordstrom, Inc. (NYSE:JWN) fell 8.7% on a downgrade from JPMorgan analysts after management meeting revealed flattish comp-store sales guidance for the next two years. Oracle Corporation (NYSE:ORCL) fell 4.2% on a quarterly revenue miss on light new license revenue. Analysts were mixed on the company’s cloud transition.
On the economic front, November housing starts fell nearly 19% month-over-month to a 1.2 million seasonally adjusted annualized rate. This was well below the 1.2 million analysts are looking for and confirms that the backup in mortgage rates is having a dampening effect on the housing market. As a reminder, November auto sales were also soft as dealer inventories rise.
As interest rates drift higher, watch for continued pressure on both housing and autos.
Looking ahead, the market continue to look vulnerable to a correction head as expectations for Dow 20,000 are off the charts amid overbought technical measures and narrow market breadth readings. According to the latest Bank of America Merrill Lynch global fund manager survey:
- Growth and inflation expectations are at five-year highs.
- Global profit expectations are at six-year highs.
- 58% of asset allocators are underweight bonds, up from 48% in November.
- Stock allocations have gone from net 8% overweight in November to 31% overweight now.
Yet the Dow Jones Industrial Average is nearly 1,000 points above its 50-day moving average, fewer stocks are participating to the upside (Wednesday was the largest selloff since October), and the ratio of new highs to new lows is rolling over again.
The risk of a January selloff is rising fast.