The Dow struggles as recessionary fears rise

The US economy involved preliminary PMIs (Purchasing Managers’ Index) for this month that continued to show contraction for both manufacturing and services.

With worsening 46.2 and 44.4 readings respectively, retail sales for the month of November not only contracted but missed with a -0.6% figure with its core also in the red, industrial production falling once more with a -0.2% reading, both New York and Philly Fed manufacturing readings below zero at -11.2 and -13.8 respectively.

Unemployment claims are below estimates at 211K a positive but continuing claims rising to the expected 1.671m.

Stocks were in for a rude awakening post-FOMC (Federal Open Market Committee) as ongoing global monetary tightening faced rising recessionary risks and shifting at-risk shorter-term technical indicators and overviews on key indices, while over in the bond market yields finished out the week lower but in real terms higher as breakeven inflation rates were in for a clear drop.

There was plenty of central bank action last Thursday following the FOMC’s Wednesday rate hike, with a 50 basis point (bp) rate hike also in store for

1. The Bank of England taking its key rate to 3.5% with two voting to keep it unchanged and another wanting a higher 75bp as further increases “may be required”
2. The European Central Bank with its deposit rate at 2% but where it came off as more hawkish with APP reinvestments of maturing bonds to drop by €15bn from February until the second quarter of 2023 and giving off the impression of further 50bp hikes as they’re in for the “long game”
3. The Swiss National Bank taking its key rate to 1% and expecting inflation to average 2.4% next year, outside the majors
4. Banco de Mexico to a record 10.5% with another hike likely at its next meeting
5. But a smaller 25bp hike for the Norges Bank taking its benchmark rate to 2.75% and “most likely” another hike will be in store with the economy likely to contract by a smaller-than-previous 0.1% next year.

As for the week ahead, it’s relatively lighter out of the US with plenty of housing data early on starting with NAHB’s housing market that has suffered ten consecutive worsening readings, well below 50, and not far off the start of the pandemic’s lows.

Building permits and housing starts are tomorrow and both offered upside surprises last time around but failed to best their previous respective readings. Existing home sales dropped eight times in a row released on Wednesday and at lows unseen since the pandemic, mortgage applications where weekly readings have been negative far more often than not even if they gained last week, and new home sales on Friday were beating forecasts haven’t managed to shift the trend of readings that are averaging lower.

While there are a few other items to digest such as final third quarter GDP (Gross Domestic Product) figures later this week (the Atlanta Fed’s GDPNow estimate for this quarter dropping again but still healthy at 2.8%), durables, and consumer confidence from both the Conference Board (CB) and (revised readings from) the University of Michigan (UoM), more pricing data on Friday will likely be the main item where expectations for the Personal Consumption Expenditures (PCE) price indices are a y/y reading of 5.3% and m/m 0.3%, with the closely watched core at 0.4% and 4.6% respectively.

There’s also the deadline for the passage of the ‘omnibus’ bill or another temporary funding one on the same day on the fiscal policy front.

Dow Technical analysis, overview, strategies, and levels

Its previous weekly 1st Resistance level managed to hold (not via fading but via reversals as post-CPI release it jumped past the level and its stop-loss (S/L) before coming back down), aiding conformist sell-after-reversals in this time frame where the overview is consolidatory, and lows for the week above its previous weekly 1st Support.

As for the daily time frame where the overview was a stalling bull, then-conformist buy strategies failed while then-contrarian sell-breakouts outperformed on the risk-off moves.

IG client* and CoT** sentiment for the Dow

As for sentiment, CoT speculators raised both long (by 717 lots) and short positions (by 1,186), the net result still majority short and rising a notch to 61%.

Retail trader bias has dropped since the start of last week, now a slight sell 53% due largely to last Thursday's plummet.

Dow chart with retail and institutional sentiment

*The percentage of IG client accounts with positions in this market that are currently long or short. Calculated to the nearest 1%, as of today morning 8am for the outer circle. Inner circle is from the previous trading day.
**CoT sentiment taken from the CFTC’s Commitment of Traders report, outer circle is latest report released on Friday with the positions as of last Tuesday, inner circle from the report prior.