There was a big sell-off yesterday and then there was a big rebound. The former took the S&P 500 below its October low. The latter carried the S&P 500 back above its October low.
The recovery rally was deemed to be a technical rebound from an oversold condition. No argument there. It got going after the indices plumbed session lows that had the S&P 500 down 1.9% for the day and down 7.4% in less than four sessions.
The official word from UK Prime Minster May that she would be delaying the vote in Parliament on the UK-Brexit plan triggered the move to the session low.
Fittingly, the market bounced back quickly from the announcement, which wasn't really a surprise. Just as fitting, Apple (AAPL), which has been among the hardest-hit stocks in recent weeks, led the rebound as it battled back from a 3.1% drop to end the day 0.7% higher.
Sure enough, there are reports this morning that U.S. Trade Representative Lighthizer, Treasury Secretary Mnuchin, and China Vice Premier Liu had a call to advance trade talks.
Those reports have been joined with other reports that China is entertaining a proposal to cut the U.S. auto import tariff rate to 15% from 40% and will be making increased soybean purchases. President Trump, meanwhile, is right on cue with a tweet this morning that indicates "very productive conversations going on with China! Watch for some important announcements!"
Market participants are eating it up, sensing that yesterday's reversal could be a technical opening to some V-shaped price action. Whether it's a capital 'V' or a lower-case 'v' remains to be seen, yet there is clearly a risk-on mindset at the moment.
The S&P futures are up 30 points and are trading 1.4% above fair value. The Nasdaq 100 futures are up 97 points and are trading 1.8% above fair value. The Dow Jones Industrial Average futures are up 296 points and are trading 1.4% above fair value.
Look for buying efforts to be concentrated on the hardest-hit stocks during the sell-off. Cyclical sectors look poised to lead as traders are latching onto the theme that positive-sounding trade developments augur well for future economic growth.
Pay close attention, however, to the behavior of the financial and transport stocks. It will be a disappointing signal if they fail to participate in the rebound effort since they are so closely tied to economic activity.
Their failure to participate would eventually be construed as a tacit signal that this rebound attempt isn't fundamentally based and will be vulnerable to an inclination to sell into technical strength down the road.
There wasn't any selling in response to the Producer Price Index for November, which was a bit higher than expected. The index for final demand increased 0.1% month-over-month (Briefing.com consensus 0.0%) while the index for final demand, excluding food and energy, increased 0.3% (Briefing.com consensus +0.1%).
The monthly reading left the index for final demand up 2.5% year-over-year, versus 2.9% in October, and the index for final demand, excluding food and energy, up 2.7%, versus 2.6% in October.
The key takeaway from the report is that it didn't inflame inflation concerns to an alarming degree, like the October report did, so market participants have not been bothered by the idea that it will drive the Federal Reserve to be overly aggressive with future rate hikes.
The 2-yr note, which was up two basis points to 2.74% ahead of the report, is still up two basis points after the report.