U.S. equities mostly finished higher on Monday amid growing excitement over the rise of Bitcoin futures trading and the tendency for prices to rise this time of year — the Santa Rally and all that.
However, trading was relatively subdued ahead of the Federal Reserve policy decision that will come later in the week.
In the end, the Dow Jones Industrial Average gained 0.2%, the S&P 500 gained 0.2%, the Nasdaq Composite gained 0.5% and the Russell 2000 lost 0.1% continuing a recent string of underperformance. Treasury bonds were unchanged, the dollar was little change, gold lost 0.1% and crude oil gained 1.1%.
Breadth was positive, with advancers outpacing decliners by a 2.1 to 1 ratio. Telecom led the way with a 1.2% gain, while financials were the laggards, down 0.2%. Spark Therapeutics Inc (NASDAQ:ONCE) fell 35% on poor clinical study data, a reminder of the lottery ticket nature of many biotech stocks. Apple Inc. (NASDAQ:AAPL) gained 2% on reports of improved delivery times for the iPhone X.
On the policy front, Republicans are closing in on a final deal on tax reform with House and Senate bills to be merged by Friday and signed by President Trump before Christmas. There is chatter of a possible upward drift in the corporate tax rate — from the 20% originally targeted — to somewhere around 21% or 22% to provide relief to the deficit elsewhere.
Looking ahead, the Federal Reserve is expected to raise interest rates for the third time this year this week. More importantly, it will be the last post-meeting press conference by chairman Janet Yellen and it will feature updated economic and interest rate projections for 2018.
With fiscal stimulus from the tax cut coming, and the labor market very tight, watch for a hawkish increase in interest rates expectations into 2019 and beyond.
Conclusion
Not that it has mattered in the slightest in recent weeks, but stocks continue to grow more and more overbought. Currently, the S&P 500’s relative strength index has increased to levels not seen since 1995. Volatility expectations have been inching higher on an intra-day basis, suggesting growing nervousness. And gold has been sliding as the “anti-fiat” types focus all their attention on bitcoin.
It feels increasingly like trading will “snap” soon and grow increasingly dynamic sometime in early January. At least, that’s the message from the Treasury bond market as the yield curve continues to compress, indicating something is amiss.
According to SentimenTrader, U.S. households are the most exposed to stocks outside of the 2000 bubble in 65 years as both a percentage of financial assets and as a share of economic output. Pension and mutual funds are also all in.
While seasonality is normally positive this time of year, even that has limits: Whenever the S&P 500 ETF hit a new high in the first half of December, it tended to decline in the week that followed (76% of the time) with an average loss of -0.7%.
Check out Serge Berger’s Trade of the Day for Dec. 12.
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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Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
