On the surface, stocks finished mixed on Wednesday in light, pre-holiday trade. But beneath the surface, there is growing evidence of a withdrawal of risk appetites, as fewer and fewer stocks hold the market aloft and equities disconnect from weakness in the commodities and fixed-income markets.
In the end, the Dow Jones Industrial Average gained a fraction, the S&P 500 lost a fraction, the Nasdaq Composite gained 0.3% and the Russell 2000 finished the day 0.8% higher. What’s more, the dollar was stronger, gold and copper moved lower and crude oil gained 0.5% in the cash session before falling after hours.
As shown below, industrial stocks continue to climb away from transports and utilities, one of many worrisome divergences in play.
Pharmaceutical stocks led the way with Pfizer Inc. (NYSE:PFE) rising 2.8% on an analyst upgrade. Energy stocks were the laggards, down 0.8%.
HP Inc (NYSE:HPQ) dropped 13.7% after missing fiscal Q4 estimates, as PC and printing sales were a drag. Management cited excess printer inventory, aggressive price competition and a lack of demand lift from the rollout of Windows 10 as headwinds.
Hewlett Packard Enterprise (NYSE:HPE) gained 3.1% on a largely in-line report, while Deere & Company (NYSE:DE) rose 4.8% after posting a big fiscal Q4 earnings beat largely on tax management and cost control. Equipment sales dropped 26% over last year, worse than estimates.
The economic calendar was fairly full, but didn’t have much of an impact on trading. Core capital goods orders rose 1.3% month-over-month, well ahead of the consensus estimate. Personal income grew 0.4% last month, in line with expectations. Consumer spending grew 0.1%, but missed expectations. Lastly, the Michigan Consumer Sentiment Index moved slightly lower.
The Atlanta Fed’s GDPNow real-time forecast model is now showing a Q4 GDP growth estimate of 1.8% — down from 2.3% last Wednesday. The drop is being driven by a decline in expected real consumer spending growth from 3.1% to 2.2% based on personal income and outlays data released today. This casts a call over the holiday shopping season just as it’s about to start; although, to be fair, the GDPNow model tends to be overly pessimistic.
Attention is being paid to the European Central Bank ahead of a policy decision next week widely expected to feature the debut of fresh stimulus measures. Options discussed include a two-tiered interest rate for banks depending on the amount on deposit at the ECB as well as buying distressed loans.
Technically, there is a lot to worry about as stocks continue to ignore weakness in bonds and commodities as shown above. The chart below shows how the Dow Jones Industrial Average is being held aloft by fewer and fewer stocks.
Once non-holiday trading volumes resume next week, we could see a bout of weakness as these divergences (and the weak buying demand they reflect) translate into selling pressure.
In response, I continue to recommend defensive positions to clients including the Dec $17 Bank of America Corp (NYSE:BAC) puts carried by Edge Pro subscribers.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
