Wednesday, December 28, 2016

Lower markets as the Dow 20,000 slips away

Dow dropped 111, decliners over advancers a relatively large 5-2 & NAZ gave back 48.  The MLP index lost 2+ to the 315s & the REIT index fell 3 to the 332s.  Junk bond funds continued mixed & Treasuries went higher, bringing the yield on the 10 year Treasury down to about 2.5%.  Oil was up pennies (under $54) & gold rose again (more below).

AMJ (Alerian MLP Index tracking fund)

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Live 24 hours gold chart [Kitco Inc.]

Contracts to purchase previously owned US homes unexpectedly decreased in Nov on a sudden pickup in mortgage rates & limited inventory, according to the National Association of Realtors.  Pending home sales gauge declined 2.5% (forecast was for 0.5% gain) after rising 0.1% the prior month.  Index increased 1.4% from Nov 2015 on an unadjusted basis.  Pending sales decreased in 3 of 4 regions on a month-to-month basis.  The drop in contract signings was the first in 3 months & shows the impact of a surge in borrowing costs that began after the election.  While home-buying activity has been spurred by further labor-market improvement and promising gains in wages, the industry also has been challenged by limited inventory, particularly for lower-priced homes that could attract entry-level buyers.  A further increase in mortgage costs risks reducing affordability as gains in property values have been outpacing income growth.  “The budget of many prospective buyers last month was dealt an abrupt hit by the quick ascension of rates immediately after the election,” the NAR said.  “Already faced with climbing home prices and minimal listings in the affordable price range, fewer home shoppers in most of the country were successfully able to sign a contract.”  Seasonally adjusted pending-sales gauge fell in Nov to 107.3, the lowest since Jan.  The NAR projects 5.42M home sales this year, up from 5.25M in 2015 & the strongest since 2006.

Pending U.S. Existing-Home Sales Fall on Higher Mortgage Rates

One measure of US equity sentiment just had its biggest jump since 2009.  Does that imply a euphoric moment that puts the bull market on death watch?  History suggests not.  A Conference Board index tracking Americans who expect shares to rise surged 45% in Dec.  While that was the highest reading in more than a decade, similarly elevated levels haven't been reliable sell signals.  6 times the survey was higher since 1997, the S&P 500 Index rose in the next 12 months by an average of 2%.  Surging confidence is a double-edged sword.  Exuberant investors are buyers, with the potential to exhaust themselves.  Dec bullishness followed the election & coincided the biggest rally ever to greet a new president.  It also came with valuations near decade highs amid the 2nd-longest bull market on record. 

Ripening Sentiment Toward U.S. Stocks Fails to Ring Sell Alarms

Gold futures rose for a 3rd straight session to settle at 2-week highs.  The Feb contract was up up $2 (0.2%) to $1141 an ounce.  Gold is attempting to snap a streak of 7 weekly declines.  The ICE Dollar Index, which typically moves inversely to gold, broke from that relationship, up 0.4% at 103.43.

Gold Futures Settle At Two-week Highs

The Dow pulled back to around its lowest in the last 2 weeks.  It's hard to make much of this retreat in light holiday trading.  On the other hand the post election rally is very tired.  The stock market remains extremely overbought (except for yield sensitive stocks).  If the bulls have already begin their long weekend, selling may continue thru the end of the week (year).

Dow Jones Industrials

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