A Long-Delayed Correction Looms in the New Year

Editor’s Note: Beat the Bell and the  Daily Trader’s Alert will return after the new year, on Jan. 2.

U.S. stocks bounced around the unchanged line on Wednesday in light holiday trading. The Dow Jones Industrial Average gained 0.1%, the S&P 500 gained 0.1%, the Nasdaq Composite gained a fraction and the Russell 2000 lost a fraction. Treasury bonds strengthened, the dollar fell, gold gained 0.3% and crude oil dropped 0.6%.

Defensive utilities and real estate investment trusts led the way with gains of 0.4%, while energy was the laggard, down 0.3%. Tesla Inc (NASDAQ:TSLA) fell 1.8% after Key Bank analysts lowered their price target on lower estimated Model 3 deliveries.

Retail stocks took a slide on post-holiday profit-taking. Remember, the sector also got a pre-holiday lift on tax cut hopes, as they are among the most heavily taxed corporate sectors. Macy’s Inc (NYSE:M) fell 4.5% while Kohl’s Corporation (NYSE:KSS) lost 2.8%. This came amid ongoing fears that Amazon.com, Inc. (NASDAQ:AMZN) will continue to pressure same-store sales and customer traffic.

And on the economic front, Consumer Confidence came in at 122.1, slightly below estimates of a 128.1 reading. November was revised lower, but remained at a 17-year high. There was some cooling of optimism surrounding the job market.

Conclusion

Below the cheerful surface, the evidence continues to grow that a long-delayed correction could come as the calendar flips to January, the holiday bills come due and the 2017 focus on President Trump’s tax reform flips to a look ahead to the 2018 mid-terms, the likely acceleration in inflation, higher interest rates and further rate hikes from the Federal Reserve.

Bullishness is off-the-charts extreme, with the chart above showing a variety of metrics very near all-time highs.

Cracks are appearing in the veneer of invincibility. The CBOE Volatility Index climbed back above its 50-day moving average today. Large-cap tech stocks fell for the sixth day in a row, the worst losing streak since November 2016. Bank stocks are under pressure. And yes, even Bitcoin is weakening again.

Check out Serge Berger’s Trade of the Day for Dec. 28.

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 the 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.

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