Equities are not immune to (geo) political risk

E-mini S&P (December)

Yesterday’s close:  2628.25

Fundamentals: A combination of fear and simple profit-taking have put pressure on equity markets around the globe. While the S&P 500 lost nearly 0.5% yesterday, it sits about 1.5% from Sunday’s all-time high.

The NQ did not accelerate selling on yesterday’s session though it remains 3% from its all-time high last week and at the low end of its range. The Russell 2000 small caps are also 3% off their high, though one that came Sunday night. They lost 1% yesterday. U.S markets are lower, and selling hasn’t accelerated domestically in an ugly fashion since yesterday’s close.

Asian markets are taking a serious beating; the Nikkei and Hang Seng are down 2%. Let’s not forget that China’s Shanghai Composite has shed 4% in just two weeks since their 10-year bond yields hit 4%. In Europe, the DAX and Euro Stoxx 50 are both down about 1%. In the U.S, the buy the rumor sell the fact action on tax-reform might have come early as yesterday’s price action in the S&P signals that this is more than a sector rotation. Yesterday the Financial Sector SPDR (XLF) finished -0.5%. However, as many jump to this conclusion, because tax-reform is just about all we hear, there are quite a few other catalysts to put pressure on equities around the world. There is a looming government shutdown if Washington cannot agree on a budget by Friday and this comes at a time when the tax legislation has revealed it would add $1 trillion to the national debt in the next decade.

Russian probe & Geopolitical risk
Is there another short-term scare on the Russian probe, or are investors simply cutting longs because of last week’s shock? The impasse that Brexit talks hit on Monday is beginning to seem a little bigger of a deal than it was made to be then. We have been discussing 4% on the 10-year in China for weeks now, but this is having a lasting effect as officials call for tighter policy and regulation. Let’s throw into the geopolitical mix Jerusalem being acknowledged as the capital of Israel. Last, but surely not least, even though the market barely reacted to North Korea launching a missile last week, it is taking notice to the continued drills that the United States and South Korea are running as tensions rise.

Furthermore, the United States is pushing for tighter policy on North Korea and needs China to continue to step up. The problem with these theories is that we are not seeing a rise in traditional safe-haven buying, but Bitcoin does continue higher. Ultimately, investors that have seen the 20% and 30% rise in the S&P and NQ that we discussed earlier, are beginning to take something off the table until we get a little more clarity over the next week.

ADP Payrolls are due today at 7:15 am CT and Nonfarm Productivity data is to follow at 7:30 along with the Bank of Canada monetary policy meeting. The data focus is Friday’s nonfarm payroll and next week’s Fed rate hike meeting.

Technicals: Yesterday we said that the damage on the chart from Monday has begun to neutralize our stance and called for a close above 2642-2644 to repair that damage. Price action held this level and rejected resistance at 2650.75-2651.25 before turning sharply lower into the close. Key support at the 2618-2619.25 level is working well to stall the selling into this morning.

We have become neutral in the near term and believe that this market can be traded from both sides. Trendline support from the Nov. 15 low now aligns with support at the 2618-2619.25 level. Minor resistance comes in at 2631.50-2633.75, however, much stronger resistance aligns multiple levels at the 2637.50 level and should provide a solid opportunity to sell the first test.

Bias: Neutral/Bullish

Resistance – 2631.50-2633.75*, 2637.50**, 2643*, 2648.25-2651.25**, 2666***, 2679-2685**, 2712****

Support – 2618-2619.25**, 2605-2607**, 2594.50-2596****, 2555.50-2565***