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Hairline Fracture in the Price Action



Chief Market Analyst

There has been a break in the buying action. What remains to be seen is if it will lead to a break in the market or whether it’s just a break before another leg higher.

Currently, the S&P futures are down 11 points and are trading 0.3% below fair value, the Nasdaq 100 futures are down 52 points and are trading 0.4% below fair value, and the Dow Jones Industrial Average futures are down 137 points and are trading 0.5% below fair value.

Bear in mind that the S&P 500 and Nasdaq Composite closed yesterday at new record highs, carrying on the big gains registered in November. The Dow Jones Industrial Average and Russell 2000 also ended higher on Tuesday, carrying on the big gains registered in November.

In other words, the negative bias in the futures market this morning is nothing more than an expectation that the major indices could run into some profit-taking interest.

There will be a tendency to blame the weakness on Congress still not being able to reach an agreement on another fiscal stimulus package and the ADP Employment Change report for November showing a weaker than expected 307,000 jobs were added to private-sector payrolls ( consensus 360,000).

The stimulus issue is a frustrating one, but don’t forget that the market still ran to a new high yesterday amid reports that a new $908 billion bipartisan proposal was not going to fly for Congressional leadership. Granted it came off higher levels following that report, yet it didn’t come completely unglued.

Also, the headline ADP number was weaker than expected, but the upward revision for October to 404,000 from 365,000 put things a little closer to the expected mark, so the November number didn’t have as much of a negative surprise factor as the headline number suggests. 

The futures market reacted accordingly to that understanding, which is to say it had a muted response to the ADP report.

Separately, there is a lot of attention today on the news that the UK approved the Pfizer (PFE)BioNTech (BNTX) Covid vaccine for emergency use. Here again, though, this news was not a surprise, which is why it has not carried more sway as a market-moving factor.

Something else that was not a surprise was (CRM) confirming that it will acquire Slack Technologies (WORK) in a cash-and-stock deal with an enterprise value of ~$27.7 billion. That news accompanied a better-than-expected Q3 earnings report from CRM is down 5.6%, though, with investors reportedly concerned about the premium price paid for Slack and some concerns that is needing to make such acquisitions to maintain higher growth rates.

Those are debatable points — and they are being debated — but the import for the market this morning is that is a Dow component and leading member of the S&P 500 information technology sector, so its weakness will be a weight for both areas.

Similarly, stock offerings from JetBlue (JBLU) and FuelCell Energy (FCEL) are reminders of the supply/dilution pressures that will be a part of the action as companies looking to improve liquidity take advantage of the big run in their stock prices to sell more shares. JBLU is indicated 7.5% lower while FCEL is down 23%.

Thus far, the broader market has been able to digest such stock offerings with relative ease as bullish sentiment has been running high on the promise of 2021. That has been evident in the price action, a dwindling put-to-call ratio, and near 50% decline in the CBOE Volatility Index from its October 28 high.

For today’s open, though, it appears as if there will be a break that is a mere hairline fracture in the bullish price action that carried each of the major indices to new record highs in recent sessions.

Originally Posted on December 2, 2020 – Hairline Fracture in the Price Action

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