What an incredible night on markets, and the volatility has hit us at a time when many are too full of Brussels sprouts to run and must face the music.
Perhaps the most glaring observation, aside from the fact the S&P 500 rallied 5%, which statistically is a 3.75 Z-score move, was that we saw only one stock fell (Newmont Mining) on the day. To put this into context, this is the best participation in a rally since Bloomberg kept these records. Volumes through the NYSE were 21% above the YTD average, but on a 5% move for the S&P 500, one could argue volumes perhaps could have been higher. The question, of course, is whether this is just a snapback bear market rally, or as Trump said, “a tremendous opportunity to buy stocks”?
The signs suggest we had reached a point of maximum pessimism
We can look focus on the market internals and see extreme pessimism had set in. Its easy to say this with the benefit of hindsight of course, but when only 1% of the index was trading above the medium-term 50-day average, while 96% of companies were trading at four-week lows, it’s pretty clear the move had gone too far, and that band had been pulled back too far – any good news was going to cause a reaction. 
We also have to remember liquidity has been a key consideration and there has been the mother of buyers strikes of late, with volatility targeting funds ramping up cash levels in the portfolio, while the trend-following crowd have been all over the collapse in crude and S&P 500 futures. Fine, we can assess the fundamental drivers, such as poor global economics, the Fed not altering its forward guidance or providing flexibility to the pace of balance sheet normalisation, and ascertain nothing has really changed here. The market is somewhat upbeat to hear Jay Powell will not be relieved of his duties, as that would have been a deep negative. But US politics is still too erratic and some have also contrast that the crossover between the US political and central bank saga as more thematic of an emerging market, and not from the world’s biggest economy, and again that seems a fair call.
S&P 500 technical support kicked in 
Let’s also take a look at the technical picture, because while the internals was pricing extreme pessimism, if the index was going to bounce it needed to do so off the 200-week MA, which defines the longer-term trend. Again, on the weekly, we can also see the uptrend drawn from the GFC lows also finding buyers, but should this be tested again in less oversold conditions will it hold?
(Weekly chart of the S&P 500, the yellow line being the 200-week MA)

Have we hit a trading low?
That is the question du jour, as it feels to me like this is a bear market rally and although we could head higher in the next few days, traders will look to fade this move. If we look at all prior rallies of over 4% since 2000, we can see similar percentage moves do not have a strong pedigree in producing a lasting counter-trend rally. Certainly, Asian equities are giving the impression that risk assets can push higher and after an earlier dip, the various markets are back at session highs. 
There are few indicators that encourage perhaps risk can go higher
Granted, it is positive that US holiday credit card spending has been reported at +5.1%, which is certainly strong relative to expectations. It is also positive that corporate insiders have the highest skew of buys to sells (in their own stock) since August 2011, and the bulls will take this to the bank. The bulls will also take price closing above the 5-day EMA, which has contained all intra-day rallies since 12 December and this encourages that at the very least we could consolidate. 
I am also enthused by the huge defence of horizontal support in crude into $42.20, and it feels like US crude could push into the previous consolidation low of $49.90 – if equities are going to rally then crude needs to be at the backbone.

We have seen rate hikes priced out of fed funds future, with just four basis points priced for 2019. The market still wants to see the economic data flow, and they have made their minds up that on current economic trends the Fed is done here. Keep in mind that overnight we saw a collapse in the Richmond Fed manufacturing report, where a -8 print was the lowest since 2016. As we can also see this is a reasonable precursor the nationwide ISM manufacturing report, which we know risk assets are sensitive too and this keeps me cautious on risk. 

We get the Chicago PMI data reported on the 29th December, and again this should slow, but the Richmond manufacturing data suggests we should see a slower pace of growth of US manufacturing through December. The question is how severe a deterioration markets and what is the correct multiple to wear under the circumstance. 
(White – Richmond Fed manufacturing index, orange – ISM manufacturing)

It seems a higher oil price, married with a more positive trend to the US and global economics is what is need to re-establish a bull market in equities and credit. 
FX markets remain comparatively sanguine, although this is a trend I don’t see changing until after Q119. 
EURUSD is a range traders paradise, with a slight bias to test the lower Bollinger Band at 1.1300. 

AUDUSD has held the October low, with the bulls getting a slight upper hand. I see an elevated risk of a move into $0.7158 in the near-term, but the conviction is low. 

Published by Chris Weston, Head of Research, Pepperstone