Bear Market Looms

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If the major U.S. indices drop another 6%, they will get us to the 200-week moving average, i.e. 2348 on S&P 500, 20687 on DOW 30, or -20% from the top. It appears as though the next stop in S&P 500 and DOW 30 is 20670 even on Christmas Eve when U.S. markets are meant to close early, equity markets continue to wilt and risk trades sour, while talk of Trump firing Fed Chair Powell didn’t help. The “do not panic” letter sent by U.S. Treasury secretary Mnuchin to the nation’s top banks also did not help as U.S. indices fell 14% in December, the largest monthly decline since the fateful October 2008. U.S. indices are also posting their 10th consecutive losing day, a streak not seen before in this millennium. CFTC positioning data showed fresh GBP/USD selling and EUR/USD stabilization. The premium short in USD/JPY hit its final target for 200-pip gain. The last two trades in the DOW were stopped out.

Bear Market Looms

USD The Strongest & Weakest

From the sunny market days of September, oil and some equity markets have fallen into a bear market in short order. Last week was the worst for U.S. equity indexes since 2011 as the S&P 500 fell 7%. Month-to-date, S&P 500 & DOW 30 are down 14%.

The worries are familiar, primarily tariffs, interest rates and Chinese growth. At the same time, there are plenty of indications that the U.S. economy is strong and few signs of a sharp slowdown, let alone a recession. One exception is business investment, something we highlighted last week. Core durable goods orders fell 0.6% in the November report and that marks a contraction in three of the past four months.

At the same time, the calendar provides some clues. The rout in the past week had the distinct flavor of a market being driven by forced selling, flows and fears. Year-end tax loss selling is undoubtedly part of the equation and hedge fund underperformance may have finally triggered waves of redemptions.

Perhaps the selling isn’t justified, but consider this: Sometimes that market can create its own narrative. Selling can stifle the mood in the economy; banks slow lending and consumers tighten up. It can become a self-fulfilling prophecy. The turmoil can also lead politicians to make some grave errors. The White House was in damage control on the weekend after reports said Trump had frequently mulled firing Fed Chair Powell in the past week.

Ironically, the biggest problem for the markets may well be the various positives of the U.S. economy, which currently act as an excuse for the Fed to commit its obligatory cyclical policy mistake.

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by – long by +. This week’s report was delayed because of the US holiday.

EUR -53K vs -56K prior GBP -61K vs -42K prior JPY -103K vs -98K prior CHF -23K vs -18K prior CAD -7K vs -12K prior AUD-35K vs -46K prior NZD -3K vs -15K prior

Specs picked a bad week to lighten up on AUD and NZD shorts as both paid off late in the week as risk aversion escalated. Meanwhile, cable slumped on Dec 9-10, but rebounded afterward and has chopped sideways. Still, it’s never more than one Brexit headline away from another rout.

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