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Recovery Trade Takes A Break



Chief Market Analyst

There was a time when the behavior of the market was characterized as risk on or risk off. These days, the characterization is more like recovery trade on or recovery trade off. It’s a subtle, but important, nuance.

With risk on-risk off, it had a lot to do with stocks doing well (poorly) and Treasuries doing poorly (well). With the shift in characterization, it now has more to do with small caps doing well (poorly) and mega caps doing poorly (well).

At the moment, the futures market seems to be favoring recovery trade off, which means small caps are slated to start the day poorly while mega-cap stocks are poised to start the day well — in relative terms at least.

The S&P futures are down 19 points and are trading 0.4% below fair value, the Nasdaq 100 futures are down nine points and are trading roughly in-line with fair value, and the Dow Jones Industrial Average futures are down 185 points and are trading 0.5% below fair value. The Russell 2000 futures, meanwhile, are down 1.2%.

Yesterday, the Russell 2000 increased 2.1% while the Nasdaq 100 fell 0.6%. The recovery trade was on. That trade has been turned off for the time being, though, for a variety of reasons:

  • There are some misgivings about the ability of President-elect Biden to get his $1.9 trln economic stimulus package passed; furthermore, there are misgivings that, even if it is passed, that payback for this package (and others) is going to take the form of higher taxes.
  • Europe, Japan, and China are all mulling the possibility of further tightening lockdown restrictions to contain the spread of the coronavirus.
  • JPMorgan Chase (JPM)Citigroup (C)Wells Fargo (WFC), and PNC Financial (PNC) all surpassed Q4 earnings expectations and they are all trading lower in pre-market action.
  • December retail sales declined 0.7% mln ( consensus -0.2%) and November retail sales were revised down to -1.4% from -1.1%. Excluding autos, December retail sales declined 1.4% m/m ( consensus -0.2%) and were revised down to -1.3% from -0.9% for November.
    • The key takeaway from the report is that it is clear consumer spending decelerated at the end of the fourth quarter, partly because of expiring benefits, weakening confidence in the short-term outlook, and restrictions on certain activities due to worsening coronavirus trends.
  • US-China tensions are simmering as the U.S. added more Chinese companies –Xiaomi and Comac — to its blacklist of companies with ties to China’s military and separately required CNOOC to get special permission first now before accessing U.S. technologies.

There is a lot of news today along different dimensions that span the political, economic, health, and earnings fronts. That also includes the Producer Price Index for December, which was largely in-line with expectations. Total PPI was up 0.3% m/m ( consensus 0.4%) and core PPI was up 0.1% ( consensus 0.1%). That left the yr/yr readings at just 0.8% and 1.2%, respectively.

There is a lot to digest this morning and there are some clear sources of indigestion that are influencing profit-taking decisions after a big run.

The rush-for-the-exits mentality, though, is still not there. Rather, it’s still a deliberate move to manage positions as the market moves around the recovery trade being on and the recovery trade being off. 

Originally Posted on January 15, 2021 – Recovery Trade Takes A Break

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