The selling was mercifully stayed on Wednesday thanks, yet again, to the Federal Reserve filling the headlines. Also helping were reports that Germany could be open to negotiating Greek debt payments with Athens, quelling fears of a “Grexit” from the eurozone.
This time, it was the release of the December meeting minutes which featured multiple references to the drop in oil prices and foreign economic pressures. Although policymakers noted these negatives would prove temporary hurdles, the fact they were even acknowledged was enough to get the buyers out of the shadows.
In the end, the Dow Jones Industrial Average gained 1.2% or more than 200 points, the S&P 500 gained 1.2%, the Nasdaq gained 1.3%, and the Russell 2000 gained 1.3%. Crude oil jumped 63 cents a barrel to close at $48.56. Treasury bonds were unchanged.
Healthcare stocks led the way thanks to a surge in biotechs, as the iShares Nasdaq Biotechnology Index (ETF) (IBB) climbed 3.7%. Consumer staples also were strong, rising 1.7%. J C Penney Company Inc (JCP) gained 20.3% on a better-than-expected 3.7% increase in same-store sales for November and December.
Technically, a bounce here isn’t surprising given the S&P 500 has shown a propensity to pirouette off of its 125-day moving average since late 2012. And it just so happens that the 125-day level coincides with the psychologically important 2,000 price level. So the bulls weren’t going to give this line in the sand up without a fight.
The chart above shows how the only significant violation of this level happened back in October and was turned around by hints from Fed officials that another round of bond buying stimulus could be unleashed if the U.S. economy lost momentum. Fast forward a few months, and the December meeting minutes confirm that the Fed’s first rate hike since 2006 is coming in the next six months or so.
It’ll be interesting to see how investors react to this reality as the year progresses.
Despite the bounce in stocks, bonds, credit and currencies were not singing the same tune, and instead continued to warn of deeper woes. German and Japanese bond yields are near record lows. The U.S. 10-year is at levels not seen since early 2013. Bank of America Merrill Lynch analysts are looking for crude oil to fall into the $30s before stabilizing, keeping the pressure on energy stocks, corporate earnings growth and business investment spending.
Another wrinkle to keep an eye on is the breakdown in the euro-yen cross exchange rate — a proxy for risk appetite in the market. Concerns over the fate of the euro, the Greek election and whether the European Central Bank will finally unveil a government bond buying stimulus program at its next policy meeting later this month has pushed the euro lower in a big way. Stocks, especially Japan’s Nikkei average, have yet to acknowledge the drop in the yen “carry trade” represented by the euro-yen rate. But, if current trends continue, they will soon have no choice.
I believe precious metals could be the beneficiary of all this, given the yen’s behavior lately looks similar to the leadup to the late 1990s Asian financial crisis (which, like now, was catalyzed by an extreme drop in the yen). In response, I have recommended the Market Vectors Junior Gold Miners (GDXJ) — up 3.4% since added — to my Edge subscribers as it emerges from a three-month consolidation zone.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
