Investors Shunning Bonds Despite 3-day Losing Streak Suggests

S&P Index futures (/ES) were trading 1% higher in premarket trading as stocks look to rebound from Monday’s selloff. The tech appears to be set to lead as the tech-heavy Nasdaq 100 futures (/NQ) were up 1.21% before the open which was being bolstered by semiconductor maker Micron (MU). Micron rallied 6.38% in after-hours trading on Monday. The company announced that it topped Wall Street earnings estimates and increased expectations due to a 70% increase in data-center sales for its cloud enterprise products. Micron continued to climb in premarket trading reaching an increase of 8.79%. 

In other tech news, Citrix (CTXS) was up nearly 9% in premarket trading on news that Elliott Investment Management and Vista Equity Partners are considering a joint bid for the company.  

Consumer staples were the top performer in Monday’s selloff but they’re starting the day with some bad news. Cereal maker General Mills GIS reported a miss on earnings estimates. The stock fell 1.80% in premarket trading. General Mills saw operating profits fall by 13% due to inflation and supply chain issues. However, they did raise their sales outlook.

General Mills isn’t the only company still having supply chain issues. McDonald's MCD is reporting that it will only sell small orders of their signature French fries in Japan for the next week because of a supply shortage. A flood in a Vancouver port and COVID-10-related labor shortages are causing the shortage in fries. Investors appeared unconcerned about the development because the stock was up 0.71% in premarket trading.

After Monday’s close, Nike NKE reported better-than-expected earnings and revenue, climbing 3.55% in after-hours trading. Tight supply lines have the company continuing to cut ties with retailers so the company can focus on sales in their own stores. Nike has recently ended partnerships with DSW, which is one of the largest shoe stores in the United States and a subsidiary of Designer Brands DBI. In 2019, Nike ended its relationship with Amazon AMZN.

Investors may be getting into a speculative mood. The VIX (Cboe Market Volatility Index) was down 4.63% in premarket trading falling below 22 in premarket trading. The Russell 2000 Index futures (/RTY) rallied 1.22% before the bell. Additionally, cryptocurrencies that have recently been correlated with “risk on” investments are seeing rallies as well. Bitcoin futures (/BTC) are up 3.87% ahead of the open. These could be good signs for stocks after a three-day losing streak.

Monday Blues

Monday saw a broad sell-off in stocks as NYSE decliners outpaced advancers about 5 to 1. However, some stocks switched sides as the margin changed closer to 4 to 1. In a time of year that tends to be a little more laid back, the bears appear to be spoiling the holiday joy.

The S&P 500 (SPX) fell 1.65% and broke through its 50-day moving average but bounced off the 100-day moving average to close 1.14% lower. However, the Nasdaq Composite (GIDS) fell 1.24% and continues to trade below its 100-day moving average. Finally, the Dow Jones Industrial Average ($DJI) fell 1.70% but bounced from its 200-day moving average to close 1.23% lower on the day. As the major indices traded off their lows, the VIX fell from about 28 to just below 23, suggesting that the bulls were waking up.

All major S&P 500 stock sectors were in the red most of the day with defensive sectors experiencing the smallest losses, including consumer staples, utilities, health care, and real state. By the close, consumer staples and utilities were slightly positive. Energy stocks were in the middle of the pack despite oil prices (/CL) falling about 5.7% in the morning session. However, oil rallied off those bottoms and closed the day down 2.30%. On Tuesday morning, oil rallied another 1.54% before the open.

Financials were the worst-performing sector despite the 10-year Treasury yield (TNX) rallying off its morning low and closing the day 1.21% higher at 1.41. The 10-year yield is right at a support level that appears to be holding. Before the open the 10-year was up another 2.33% trading at 1.45.  

Taking the L

Speaking of yields, and looking across bond market maturities, there was very little bond buying for such a down day in the stock market, and in fact, bonds sold off into the close. When investors “flee” an asset class, you can often look around the financial markets and determine where investors are going. In this case, investors don’t look like they’re going anywhere. Outside of bonds, investors often buy gold when they’re bearish, but that didn’t happen either because gold futures (/GC) were down 0.83%. 

Some commentators in the financial news were attributing the sell-off to rising Omicron COVID-19 cases. Others saw it as a reaction to President Biden’s Build Back Better (BBB) bill failure. No doubt, those news items likely contributed to the sell-off, but it could be that the selling was a result of tax-loss harvesting.

You may remember that tax-loss harvesting occurs when investors sell losing positions to realize or “harvest” losses and then use those losses to offset gains realized from the rest of their portfolio during the tax year. This could potentially lower the amount of taxes an investor owes. I warned in my December Outlook that tax-loss harvesting could cause some volatility as the year ended. If this is a driver for today’s selling, then the selling might be temporary.  

Without seeing another asset class benefiting from the sell-off, it could be that many investors are going into cash because they’re taking losses for tax purposes. It may seem like a Scroogey thing to do this time of year, but some investors might say it’s “a poor excuse for picking a man’s pocket every 25 of December.”

Small Stock Support

Looking for a bit of hope, the Russell 2000 (RUT) small-cap index fell below support on Monday, but the bulls rallied back above support. If the bulls can hold this level, it could be a good sign for small-cap stocks. I’ve mentioned before that small-caps tend to outperform in January and February under the phenomenon known as the January Effect. Of course, this doesn’t happen every year, but it makes sense to keep an eye on these small-cap stocks in December to see if investors start accumulating shares early. 

CHART OF THE DAY: HOLDING THE LINE. The Russell 2000 Index (RUT—candlesticks) tried to break support, but the bulls battled back on Monday. The NYSE Advance/Decline line (green) has recently turned down. Data Sources: ICE, S&P Dow Jones Indices. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

Breadth of Heaven: The weakness in the Russell 2000 and a falling NYSE Advance/Decline line indicate that investors are just not very bullish on stocks right now. Instead of buying stocks that have the potential for growth, they seem to be fixed on large-cap and value stocks right now. A broader base of buying is needed if the bull market is to continue.

Casualty of BBB: Solar stocks were hit during Monday’s sell-off by the failure of the BBB bill in the Senate. In my Monday morning Market Update, I warned that one of the things that could hurt solar stocks would be the waning government support. SolarEdge SEDG fell 9.51% on the news, weighing down the MACD Global Solar Energy Stock Index, which fell 5.60%. Democrats hope to bring back a different version of the bill in 2022 that could benefit solar stocks.

Reindeer Power: It just got harder for automobile companies to make the nice list because the Biden administration raised fuel-efficiency standards for cars and small trucks to 55 miles per gallon (mpg) by 2026. This raises the standard set by former President Donald Trump of 43 mpg by that same year. According to The Wall Street Journal, the Alliance for Automotive Innovation said that automakers will need federal support, aka tax dollars, in order for the auto industry to make the transition.

Automakers were another “casualty” of the BBB bill’s failure. $20 billion of the bill was to go toward tax credits for the purchase of electric vehicles and funding for domestic manufacturing of battery plants. 

TD Ameritrade® commentary for educational purposes only. Member SIPC.

The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. The content was purely for informational purposes only and not intended to be investing advice.

Image Sourced from Pixabay