Intra-Day Reversal

It’s rarely any one single element that leads to major reversal such as we saw today. However, we can identify a half dozen elements today are significant and contributed the mid-day sell off:

1) The intraday reversal was set up by the opening exuberance and emotional New Year buying – not fundamentals.

2) The drop in Copper and Oil is reflecting a slow down in the United States economy; The CRB Index broke support at 300

3) ADP data – which in the past has been none too reliable — surprised to the downside significantly;

4) Both Ford and GM saw sales declines of 13% in December;

5) ISM remains near the flatline, as Manufacturing is still struggling with inventory and decreased demand; (who is all excited about 51% and change?)

6) FOMC minutes reveal inflation remains the primary risk to the economy, even as it shows signs of being a "touch softer" than the Fed previously believed.

Note that the selloff in equities began an hour prior to the FOMC minutes . . .

It’s still early, and after dropping 150 points, equities are clawing back. Regardless, today is quite interesting.

~~~

UPDATE January 4, 2006 5:55am

Trader Mike has a good couple of charts and several worthwhile links to those who are interested in the Technical underpinnings of the reversal . . .   

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  1. emd commented on Jan 3

    gotta think today’s volatility is going to make people pause…. esp since we haven’t seen such volatility for a while.

  2. lurker commented on Jan 3

    giant DOJI or bearish engulfing or key reversal…none are bullish.

  3. emd commented on Jan 3

    is this what quiet distribution looks like? don’t want to spook the market too early.

  4. gsym commented on Jan 3

    where does one go to look at inventory data??

  5. Bucky Katt commented on Jan 3

    It was a nice set-up. I played both sides.
    The message is when the FED coughs, run!

    This helped the up/down>

    Today the moon goes full @7:57 AM cst. The Full Wolf Moon/After-Yule full moon, take your pick…
    Either way, the wolf is hungry.

  6. S commented on Jan 3

    The irrepressible dip buyer is alive and well and determined as ever to prevent a correction. Amazing.

  7. Robert Coté commented on Jan 3

    Guy falls into a coma in 1982. Wakes 25 years later. First question: “How’s President Reagan?” “I’m sorry. Reagan is dead.” “Oh my God! That means that idiot Bush is President!” DJIA up 12pts after being closed for a rare 4 consecutive days. Therefor the DJIA has traded +100/-100pts for the past week. Nohing happened despite an extended coma.

  8. Andrew commented on Jan 3

    This is great….. I hope the bulls run it up. It will give me a chance to correct my errors of not fading earlier today…..

    Failing rallies should not be overlooked…. I would be cautious if I were long.

  9. CDizzle commented on Jan 3

    I focused on the following:

    -Where was volume on the stocks that I follow? Big early? Big late? Heavy/light volume?

    -(Long) Industry pros came back from a week off (and 4 days – longest break since 9/11 – to those who were in last week) delighted to see some solid fundy data…and it bolstered the indices early. But, when the other shoe dropped, they were (presumably) quick to the exits.

    -My ‘old faithfuls’, i.e. tobacco and utilities to name a couple, held up pretty well into the afternoon.

    -Does it really matter if oil goes to $50 considering a lot of the ‘hot wealth’ created in the last 12-18 months is invested in those stocks which got el whacko today as the result of oil prices dipping? Point being – I’ve heard many state that if oil continues its slide that it will be some sort of antidote to the markets.

    -Long the VIX?

    Good stuff…great start to ’07.

  10. glenn_in_MA commented on Jan 3

    Cramer says the sell-off was due to a seller in the futures market…when the seller was done, the markets reversed to the upside. Personally, I don’t believe that explanation because it seems too simplistic to me…plus I’m just a student of the markets and don’t any better!! But….I’d certainly like to hear other’s opinions.

  11. Fred commented on Jan 3

    ” 5) ISM remains near the flatline, as Manufacturing is still struggling with inventory and decreased demand; ”

    Well, actually these numbers were better than concensus across the board, and especially prices paid…was down 7.5 points vs expectations.

    I’d be curious what numbers would imply a soft landing to you Barry?

    Thanks

  12. GerryL commented on Jan 3

    Barry,

    I am still amazed by the statistic that 75% of home building is in private hands. Are there details on that anywhere?

  13. V L commented on Jan 3

    It looks like a sector rotation to me.

    According to today’s $TICK, the first major sell program fired at 13:15, it was followed by multiple major sell program artilleries ($TICK < -1000) roughly until 14:45. The first major buying program fired at 15:30 ($TICK > 1000) with a few following it.

    P.S. Maybe it was because many hedge fund managers went to pick up their bonus checks. Most were out of the office this afternoon and nobody was in charge of manipulating the market. Some folks have witnessed an army of hedge fund managers driving in their Ferraris to the bank to make deposits.
    http://www.exoticcarsite.com/multimedia/wallpapers2/ferrari-12.jpg

  14. ac commented on Jan 3

    Fred, I don’t think Barry thought much of the “better” than expected numbers and expects further declines in the coming months. Monthly numbers can be noise for all intents and purposes.

    I would worry more about the ISM non-manufacturing. Considering the ADP report hints that employers overhired/expanded last November and consumption beginning to decline as liquidity is beginning to turn off into a little credit crunch. It could really tumble.

  15. winjr commented on Jan 3

    Don’t know if anybody saw this yesterday.

    The National Association of Credit Managers runs a monthly diffusion index similar to ISM. The results for December were discouraging, particularly in the service sector:

    http://www.nacm.org/resource/press_release/CMI_current.shtml

    “The service sector fell for the third consecutive month, dropping 2.5% as eight of the 10 components fell. “It is worthwhile noting that five of the 10 components are now below the 50 level, indicating a contraction in activity,” he said. There have not been this many components below 50 since March of 2002, and the total services index has not been this low since March of 2003.”

    Apparently, more folks are getting stiffed. The “Accounts placed for collection” category plummeted from 52.5 to 44.7, and the “Dollar amount beyond terms” category fell from 49.7 to 46.1. The only categories that saved the services index from unmitigated disaster was bankruptcies, up to 58.3 from 59.2, and new credit applications, up from 56.3 to 58.9.

  16. ac-clone commented on Jan 3

    Fred, I don’t think Barry thought much of the “better” than expected numbers and expects further declines in the coming months. Monthly numbers can be noise for all intents and purposes.

    I would worry more about the ISM non-manufacturing. Considering the ADP report hints that employers overhired/expanded last November and consumption beginning to decline as liquidity is beginning to turn off into a little credit crunch. It could really tumble.

    Posted by: ac | Wednesday, January 03, 2007 at 04:52 PM

    Hey, that’s pretty good… I almost might have written that myself. It’s nice to be loved I suppose.

    I’m not sold on this ADP report, though.

    My argument would be more along the lines that we’ve seen a stimulant effect from oil in Q4. And that Roubini’s hypothesis that falling oil prices were indicative of a rapidly slowing economy was wrong – the decline in oil prices resulted more from a minor speculative bubble bursting, and thus a positive for the economy. Longer term I expect the effect from housing to overwhelm and positive effects of lower energy prices.

    This is just a regurgitation of my interpretation of David Rosenberg’s position.

    I’m ready to jump into the soft landing camp if somebody will just explain to me where the US consumer will get the money to keep spending with a negative savings rate now that house prices are unequivocally falling (and they no longer have the cushion of their primary asset rising in value).

  17. Fred commented on Jan 3

    The savings rate is a flawed number, that doesn’t include retirement accounts, and capital gains. If you’re waiting to see that come back, you’ll be waiting a long time. The US invests. It also uses leverage (many times to a fault), but buying everything for cash, and carrying no debt went out with the Depression.

    Japan has good savers. Is that the model that you want??

  18. CDizzle commented on Jan 3

    GerryL –

    I know whose input you asked for and I know I’m not him, but, I’ll offer the following:

    Take for instance the St. Louis MSA. Roughly 2,250,000 people. Solid SF construction growth for several years. Several local homebuilding companies with annual revenues of $50-100 million. ZERO homes built by publicly traded companies in St. Louis in the last 5 years (as far as I know).

    I imagine that St. Louis is in the minority of metropolitan areas without a publicly traded builder in the market, but it goes towards Barry’s figure of 75% private.

  19. fenner commented on Jan 3

    I was taking a walk this afternoon when I turned around and ran back to my office to short the q’s. Too late, I missed the drop. The reason I turned around? I got to thinking about Bush’s announcement that he’s sending more troops. I had a Vietnam flashback and those seventies sell-offs due to a budget out of control, inflastion rising and a president completely out of touch. It occurred to me that it will be next to impossible to paint a rosey picture of the US with an out of control president throwing money and lives down the toilet. That’s why I believe we’ve hit a top. Maybe not a nasty sell-off, too many have a hand on the emergency brake, but a chipping away and then an occassional break down. Nothing to do with those minutes or the adp, everything to do with the actions of an insane president. Basically the guy is out of the closet… had Ford not pardoned Nixon, this clown would never have assumed office because guys like Cheney would have been witnesses in that trial and nobody would have ever forgotten it. Meanwhile, Tricky Dick’s boys and their stool pigeon have flushed the economy along with the goodwill of the nation down the toilet.

  20. winjr commented on Jan 3

    “If you’re waiting to see that come back, you’ll be waiting a long time.”

    Is that so? How long might that be? It’s been negative for only 20 months now, so should I not expect the savings rate to be positive until … when? … 2010? Later?

    I’d like to know why you think the savings rate is a dinosaur. I suppose you must mean that capital gains is the new income supplement, no?

  21. Bob A commented on Jan 3

    One thing for sure. There were a lot of stock holders with their fingers on the “sell now, ask questions later” button today.

  22. GerryL commented on Jan 3

    CDizzle,

    I dont doubt Barry’s numbers. I am just very surprised by them. I knew that the home building sector was very segmented without any builder having a dominant share. However, I didnt realize the major builders together controlled such a small percentage of the market. I think that if there were a small number of players controlling the market they would be more disciplined in cutting back on building.

  23. jj commented on Jan 3

    major factor for today’s intraday sell-off was a pretty large rebalancing :

    seller $780M S&P’s (notional)
    buyer $265M MidCap contracts
    buyer $160M Russell 2000 e-minis

  24. V L commented on Jan 3

    This is how the bulls-in-denial see it (as always they did not see it coming):

    “The concern is that the Fed was seeing something at their last FOMC meeting that suggested potentially more pronounced weakness than we had all been anticipating in the economy,” said Drew Matus, senior economist at Lehman Brothers Inc.

  25. wcw commented on Jan 3

    Those aren’t Barry’s numbers, they’re from the CEO of Beazer Homes at the UBS homebuilder-CEO panel. Click through a couple times and listen for yourself.

    If I wanted to confirm the data, here’s what I’d do: grab the 10-Ks from the largest public builders (CTX, DHI, KBH, LEN, MDC, PHM, RYL, TOL) and sum the units delivered in the last fiscal year. Go to the census web site and check the total number of new housing units. Subtract. It won’t be exact, but it’ll give you a really rough idea.

    Hell, I’ll do it. Click.. click.. click..

    CTX 39,232
    DHI 51,980
    KBH 31,009
    LEN 42,359
    MDC 15,307
    PHM 45,630
    RYL 16,673
    TOL 9,099
    ———–
    tot 251,289

    From the census (XLS), total completions for single-family units from 05Q4-06Q3 are 1,686,000

    So, the largest public builders are delivering 15% of the units. My guess, though there is no way I am doing the lifting on this data, is that you get to 25% by adding all the other little public builders, and by looking at revenue rather than units.

    Still, I’d say it is easily defensible that 75% of the homebuilding business is private.

  26. wcw commented on Jan 3

    Now, back on-topic..

    Jj, while $0.8B is real money, it is a pittance versus the $100B/day transacted on US equity markets.

    I am not a pure Cramer-hater, but he has a nasty tendency to ascribe big moves to tiny little effects, like an options or a futures trade that is a pimple on the total volume of the market in question. I don’t know if your “rebalancing” numbers are from JJC, but they really, really look like his thinking to me.

    Long story short: I don’t know why the market went down, but I know damned well it was not because of a single, pissant, billion-dollar rebalancing.

  27. ac commented on Jan 3

    My argument would be more along the lines that we’ve seen a stimulant effect from oil in Q4. And that Roubini’s hypothesis that falling oil prices were indicative of a rapidly slowing economy was wrong – the decline in oil prices resulted more from a minor speculative bubble bursting, and thus a positive for the economy. Longer term I expect the effect from housing to overwhelm and positive effects of lower energy prices.

    That is possible, but I don’t agree. The speculative bubble burst because the economy had begun weakening and provided very little in a stimulating effect. Energy prices are as they always have been, vastly overestimated in economic downturns and overestimated in economic upturns like 1998. The 1973 recession for example, wasn’t caused by the OPEC embargo, but quickly rising inflation due to a crashing dollar from the fall of Bretton Woods.

    The consumption side was weaker in December due to rising inflation and weakening dollar.

  28. GerryL commented on Jan 3

    wcw,

    Thanks for the information.

    I think this helps explain why it is so hard to get the builders to stop building. If the market was controlled by a few large builders they could slow down through collusion (I know it is illegal). With a nod and a wink they could agree to slow building. However, with so many builders that wont work.

  29. ac commented on Jan 3

    Also remember the “measurement issues” with automobile output:

    “likely caused an overstatement of the rate of increase in real GDP in the third quarter, and the gradual unwinding of those effects would probably lead to an understatement of real GDP growth over the next several quarters.”

    Can anybody in the government do their jobs anymore? Just think if growth was measured at negative 1 percent?

  30. ac-clone commented on Jan 3

    My argument would be more along the lines that we’ve seen a stimulant effect from oil in Q4. And that Roubini’s hypothesis that falling oil prices were indicative of a rapidly slowing economy was wrong – the decline in oil prices resulted more from a minor speculative bubble bursting, and thus a positive for the economy. Longer term I expect the effect from housing to overwhelm and positive effects of lower energy prices.

    That is possible, but I don’t agree. The speculative bubble burst because the economy had begun weakening and provided very little in a stimulating effect. Energy prices are as they always have been, vastly overestimated in economic downturns and overestimated in economic upturns like 1998. The 1973 recession for example, wasn’t caused by the OPEC embargo, but quickly rising inflation due to a crashing dollar from the fall of Bretton Woods.

    The consumption side was weaker in December due to rising inflation and weakening dollar.

    Part of the argument I would make is psychological – the rapid dropoff in gas prices that occurred stimulated consumer spending in Q4. A dollar discount on a gallon of gas seems like a big deal, even if it’s not.

    In any case, I wouldn’t argue that (relatively) low oil prices would prevent a recession, otherwise we wouldn’t have had one in 2001.

    The factors that will initiate a recession IMO will be a) significant dropoff in housing completions and b) the realization by the US consumer that their leveraged bet on housing has gone bad.

    Neither of these things have happened yet, but I believe they will in the next couple of quarters.

  31. ac commented on Jan 3

    Part of the argument I would make is psychological – the rapid dropoff in gas prices that occurred stimulated consumer spending in Q4. A dollar discount on a gallon of gas seems like a big deal, even if it’s not.

    In any case, I wouldn’t argue that (relatively) low oil prices would prevent a recession, otherwise we wouldn’t have had one in 2001.

    The factors that will initiate a recession IMO will be a) significant dropoff in housing completions and b) the realization by the US consumer that their leveraged bet on housing has gone bad.

    Neither of these things have happened yet, but I believe they will in the next couple of quarters.

    While fluxing prices can possibly enhance or deepen a downturn or upturn, they usually aren’t that noticeable. During the 2001 recession, the price of gas fell actually during the recession but it got worse the longer it went on. While the psych aspects may be intially positive, the speculative bust do to a weakening economy is long past during last fall. Gas has been the farthest thing on the consumer mind at this point and has been the last 2 months.

    The ADP report in my opinion is superior to the governments reports and I suspect the US economy contracted in December. Stagnant manfacturing aside, I wouldn’t be surprised the Non-ISM didn’t outright crash in December, maybe lower than the ISM if you want a wild bet. I don’t know what the farthest it has dropped in one month, but this economy shed jobs in December and Q4 growth was most likely negative.

  32. ac-clone commented on Jan 3

    The ADP report in my opinion is superior to the governments reports and I suspect the US economy contracted in December. Stagnant manfacturing aside, I wouldn’t be surprised the Non-ISM didn’t outright crash in December, maybe lower than the ISM if you want a wild bet. I don’t know what the farthest it has dropped in one month, but this economy shed jobs in December and Q4 growth was most likely negative.

    Accurate indicators are important, obviously, but I’m trying to convey that I’m not concerned with what happens in Q4.

    To put it another way (sorry Barry), economic indicators don’t change the big picture.

    People keep pointing to economic growth to support their argument that everything is A-OK. Yet the irony is that economic growth is usually the cause of recessions.

    Not economic growth per se, but the kind that kind that results from “unrequited” investment/debt.

    In the short term this can lead to the impression that we’re living in exceptionally good economic times, when in fact the opposite is true.

  33. Si commented on Jan 3

    Find it kind of amusing that a day reversal brings on so much commentary and not just here it has to be said. Its going to be really interesting when the next good correction arrives(if ever). The wailing, nashing of teeth, pulling out of hair on cnbc, cramer etc is really going to be something to see. I might even turn on bubblevision a bit, just to take a look.

  34. toon commented on Jan 3

    So much attention on Markrt. no use.
    Just short BBY, SBUX, MOT, GOOG, RIMM and make money

  35. Juan de la O commented on Jan 4

    ac-clone, it sounds as though you’re thinking along the lines of a crisis of overinvestment and with this a drop in both rate and mass of economic profit, which firms attempt to offset by reducing their wage bill, hence downwards pressure on wages and greater unemployment, both having demand side effects.

    Well, if that’s your argument in a nutshell, I agree but would note that in a globalized economy overinvestment does not have to take place in only one nation, e.g. overaccumulation in China can have negative consequences for economic profit here just as the overproduction of houses here can have negative consequences in the Chinese economy. The cycle has, since 1970, been tending towards greater global synchronization. Given the reality of uneven development and the attempts by each nation to offload costs to others, this can never be perfect but a tendency has been evident.

    Recessions develop beneath the surface, gradually breaking through into the various indicators and relations between them, gradually becoming evident on the surface. Last time that I looked, using quarterly NIPA data from 1Q02-3Q05, U.S. nonfinancial corporate profit while still rising in an absolute sense had peaked in 2004 on a year over year rate of change basis, i.e. its rate of rise had begun to fall off. Now this is far from perfect but does give some idea when combined with other measures.

    Yes, lower gasoline prices should have provided a psychological boost but, as ac notes, that was some months ago and, in any even, when the psychological is placed against real employment uncertainty, real overdue bills, real decline in one’s largest asset, etc, the psychological changes, bends.

  36. Richard commented on Jan 4

    Barry the ADP data is not supposed to correlate closely with the government statistics. it’s just another measuring point to throw into the basket to come up with a more meaningful empirically based number and that’s how analysts are using it.

  37. Barry Ritholtz commented on Jan 4

    On average, the delta between ADP and non-farm data from BLS has been only 60K over the last 5 yrs. Consensus at 110k means Friday’s report has to be more than 2 standard deviations away yesterday’s -40K ADP number;

    While that’s not impossible, its a longshot.

  38. Eclectic commented on Jan 4

    Richard, I think if you go to ADP’s site FAQs, you may agree that their estimate has every intention of mirroring BLS as a national estimate of non-farm jobs:

    http://www.adpemploymentreport.com/ner_faq.aspx#interpret

    While it would be impossible to argue with a conclusion that their data set is indeed unique, they merely intend to use their unique data to achieve the same econometric estimate derived by BLS in a different way.

    And for BR,

    C’mon Barry, let’s play “O and U”… I know you’ve got the delirium tremens for it… C’mon!, C’mon!… a little hair of the dog can’t hurt!

  39. Eclectic commented on Jan 5

    Richard,

    One last thing about the ADP employment report, since it’s become such a hot topic of discussion about whether we can trust it or not.

    I’m not offering an opinion about that, because I don’t have a basis for offering one. However, it’s clear that ADP, through their analytical partner, Macroeconomic Advisors, actually intends to promote it as a superior measure to BLS’s same econometric for non-farm jobs.

    They further assert it can anticipate subsequent BLS revisions.

    Quoting them from their site:

    “Empirical analysis performed by Macroeconomic Advisers suggests that the ADP National Employment Report is a better advance indicator of the monthly change in establishment employment than available consensus forecasts, and that it anticipates revisions to the BLS measure.”

    –end quote

    http://www.adpemploymentreport.com/report_analysis.aspx

    That is; they anticipate that their more quickly obtained measure will prove more accurate than BLS’s, both initially and then even after BLS goes through its final revisions. I have no doubt that Macroeconomic Partners has a professional statistical basis for claiming this or they wouldn’t make the claim.

    ADP and its partner are clearly convinced of their accuracy already, but the public will require more observations over time to judge this since ADP has a relatively short history of making the analysis public.

    If it indeed proves to be true that it is superior, as judged by the public, then the ADP report will surely begin to supplant the BLS report in its ability to influence financial markets.

    Time will tell, of course, but were we to have already formed an opinion (either way) about the accuracy of ADP’s report, based on general media commentary to date, in my view we’d have formed our opinion based on the spin put on that commentary by natural human bias that is all but impossible to avoid.

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