Wall Streeters Are Priming for a Tradeable Bounce: Taking Stock

(Bloomberg) -- Investors continue to flee U.S. stocks in droves, just like last week. That’s not surprising given that so many indices and sectors are already in or approaching bear market territory, but the data is still pretty astonishing.

U.S.-based stock funds have seen almost $81 billion of outflows in the 14 days through Dec. 19, according to Lipper data; that figure represents about one percent of total assets in this particular type of fund. If the pace holds through the New Year, December will go down as the largest monthly exit from U.S. equity funds on record (dating back to 1992).

Could that be a contrarian indicator?

Throw in the the fact that the CBOE composite put/call ratio closed at a record 1.84 (dating back to 1995), as the chart below shows.

Tradeable Bounce?

Is the sudden spike in bearish bets another contrarian indicator that could potentially lead to a tradeable bounce? Some market participants seem to think so.

Jonathan Krinsky, chief market technician for Bay Crest Partners, said that the one-day surge in the put/call ratio coupled with another extreme, the S&P 500 nearing 2,440, potentially sets this market up for "a little ’Santa Claus Rally’ as we head into next week."

He’s not alone. JonesTrading Chief Market Strategist Mike O’Rourke also calls out the record put/call ratio in addition to improved valuation on the S&P 500 -- settling at 15.7x 2018 earnings, with any further drop placing it within the range of its historic long-term valuation -- as reasons for short term optimism.

Pleading for a Floor

I won’t go through every index or group that’s currently in or near a bear market, as the laundry list has already been splashed all over the terminal, television and Twitter. But I will point to one number that should be scribbled on a Post-it Note and taped to your monitor: 2,344.60.

That’s the level where the S&P 500 will technically be in bear market territory. That’s well below the 2,440-2,450 level that we bounced off of on Thursday, which some have called out as the next level of support and may be tested again given the ~8 handle drop in the e-minis this morning.

It’s also below the next support level at ~2,400-2,420, which features another major whole number. That range was the last lengthy pause of consolidation in the raging bull market, way back in the summer of 2017, before the February meltdown in stocks.

But 2,344.60 seems like a big deal and clearly not out of near-term reach given the lurching swings that have become commonplace in this market. For sure it’ll be a red headline on the terminal, as it already looks like a foregone conclusion that the Nasdaq will slide into bear market territory any day now (just a half percent away from yesterday’s close) -- and fine, that’ll get a red headline too.

Peaking Volumes (and a ‘Quadwitch’)

We’re just days until Christmas, a time when newsflow and volumes are supposed to be light, but this year is clearly an anomaly in that regard.

The action has been anything but quiet over the past week, with everything peaking on Thursday when we had the second-highest volume session on the consolidated tape all year (see chart below).

Quadruple witching will ensure that things don’t have a chance to simmer down today, as the confluence of options and futures expirations tend to lead to a swelling of overall market volumes.

No FedEx-Like Scare

Nike was the one big earnings to watch Thursday night, and they did not disappoint. Results were solid, as the company reported its 26th straight EPS beat and saw quarterly revenues above the highest estimate on the Street. Perhaps more importantly were the comments about impact, or lack of, from the U.S.-China trade situation, which should allay fears from investors still wincing from the recent FedEx scare.

Shares are zooming up over 8% pre-market, aided by two sell-side upgrades, and poised to take athletic and footwear apparel peers like Under Armour, Foot Locker, and Skechers with it.

The Swoosh machine cited "strong results and momentum" in their international geographies, which is especially reassuring given that the company missed estimates in Greater China last quarter.

Morgan Stanley had this take on the non-U.S. strength: "On a 2-year constant currency basis, NKE delivered accelerating revenue growth across the globe, with EMEA and Greater China particular standouts. Both accelerated 14% on a 2-year basis, which should calm investor fears around recent international retail and macro data points."

CFO Andrew Campion also soothed with these comments on the trade war: "While there has been uncertainty of late regarding U.S. China relations, we have not seen any impact on our business. Nike continues to win with the consumer in China." And in response to a question about any slowdown concerns in Europe and China, management said the company is "seeing extraordinary momentum in both markets."

Nike and FedEx are clearly very different companies in different sectors with ~$65 billion of market value between them. That said, I do find it interesting that the former has higher sales exposure to the international landscape (NKE has ~3/5 of its revenue outside of North America vs only 1/3 of FDX sales outside the U.S.), and yet it’s outperformed handily over the past year, as the chart below shows.

On Tap for the Next Couple Weeks

Two holiday weeks in a row means lighter-than-usual liquidity and wider spreads, which doesn’t exactly pair well with a tape that’s exhibited higher volatility and volumes than usually expected at this time of the year, and especially one that’s flirting with bear market territory.

As for catalysts, a whole lot of nothing is expected next week aside from some economic data in the U.S., much of which deals with home prices and sales, and any future surprises out of the White House i.e. a looming shutdown, more high-level departures. The following week isn’t much better -- some U.S. and China eco data, monthly auto sales, and a handful of smidcap earnings -- until we hit Friday.

That’s when we’ll get the all-important jobs number followed by a potentially even more important joint interview at the American Economic Association that involves Fed Char Powell and his two predecessors, Janet Yellen and Ben Bernanke. This is the first time we will have heard from Powell since Wednesday’s FOMC decision that sparked the last leg down in the market.

Notes From the Sell Side

Facebook got a downgrade to sell from Germany’s DZ Bank, who is now at the low end of the Street with price target of $115. They cite poor management optics and the danger of advertising clients pulling business. Separately, one of the biggest bulls out there on the name, Laura Martin at Needham, is cutting her target to $170 from $215 and cites a slew of near-term risks (EU taxation, falling Eurozone growth, U.S. headline risks and margin pressure), similar to what she did with Apple yesterday.

Citi is downgrading Altria to a sell (shares are already down 1.4%) as the company is "effectively signaling it is doubtful about the future of its core business" with the $12.8 billion purchase of a stake in Juul. They add this eye-popping stat: Every other large U.S. Staples company that has made an acquisition of >$5 billion since 2014 has underperformed.

And JPMorgan is calling Broadcom their top pick in the semiconductors space for 2019. They add the stock to the analyst focus list, citing "multiple growth tailwinds (cloud datacenter networking upgrade cycle, strong custom ASIC pipeline with customers like Google, broadband segment recovery, iPhone content gains), strong and diversified tech infrastructure business model, solid free cash flow generation, and another strong dividend raise coming next year."

Tick-by-Tick Guide to Today’s Actionable Events

• 7:35am -- KMX earnings
• 8:30am -- GDP, Durable Goods
• 9:00am -- KMX earnings call
• 10:00am -- Personal Income, PCE Core, University of Michigan Sentiment
• 2:30pm -- SEC commissioner Kara Stein on Bloomberg TV

To contact the reporter on this story: Arie Shapira in New York at ashapira3@bloomberg.net

To contact the editors responsible for this story: Chris Nagi at chrisnagi@bloomberg.net, Steven Fromm

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