Markets Begin Year End Window Dressing!

Is Santa Coming?

KR Opinion

The market is beginning to show signs of the anticipated year-end repositioning, with yesterday's selling pressure potentially marking the start of both rebalancing activities and window dressing by institutional investors. The technical indicators from our databases are responding to this weakness, suggesting the possibility of continued downward pressure in the immediate term.

Market sentiment appears increasingly cautious as we approach two critical inflation reports - CPI on Wednesday and PPI on Thursday. While yesterday's declines weren't severe, they align with algorithmic projections indicating potential negative fund flows as we move toward year-end.

The context is particularly important for the NASDAQ, which has posted an impressive gain of over 31% this year. This substantial return creates a natural environment for profit-taking, as portfolio managers may look to lock in gains before year-end. Many institutions typically reposition their portfolios during this period to realize profits or adjust their risk exposure heading into the new year.

The timing of these moves, coinciding with major economic data releases, suggests we could see increased market volatility in the coming days as investors navigate both technical repositioning and fundamental economic considerations.

Looking Back on Monday’s Action

The major indices retreated from Friday's record highs, with both the S&P 500 and Nasdaq Composite opening lower and remaining in negative territory throughout the session. Market participants showed caution ahead of several significant events this week, including Oracle's earnings report, upcoming inflation data (CPI on Wednesday and PPI on Thursday), and the European Central Bank's policy meeting.

NVIDIA's shares faced pressure, dropping 2.6% following Bloomberg's report of a potential Chinese antimonopoly investigation. This decline, combined with broader valuation concerns and technical indicators suggesting overbought conditions, contributed to market weakness.

The day's decline evolved from a modest retreat to a broader market selloff. While small and mid-cap stocks showed early strength - with the Russell 2000 rising as much as 0.8% and the S&P Midcap 400 gaining 0.5% - both eventually succumbed to selling pressure, ending down 0.7% and 0.5%, respectively. Market breadth deteriorated throughout the session, reversing from early 2-to-1 positive readings to negative territory by the close.

Chinese stocks provided a notable bright spot, with the iShares China Large-Cap ETF surging 9.5% after Chinese officials signaled more aggressive fiscal stimulus and looser monetary policy for 2025. Corporate activity also generated some notable moves, with Hershey's shares jumping 10.9% on reported takeover interest from Mondelez, while Interpublic Group gained 3.6% on acquisition news.

Sector performance was broadly negative, with financials (-1.4%), communications services (-1.3%), and utilities (-1.3%) leading the decline. Only health care (+0.2%) and real estate (+0.1%) managed to post gains. Comcast notably weakened after warning of broadband subscriber losses due to hurricane impacts.

The Treasury market saw yields rise, with the 2-year note yield increasing three basis points to 4.13% and the 10-year yield climbing five basis points to 4.20%. These moves followed President-elect Trump's weekend media appearance discussing tax policy, trade, and immigration. Adding to inflation concerns, the New York Fed's Consumer Expectations Survey showed slight increases in inflation expectations across all measured timeframes.

Nasdaq Composite: +31.5% YTD

S&P 500: +26.9% YTD

S&P Midcap 400: +19.2% YTD

Russell 2000: +18.0% YTD

Dow Jones Industrial Average: +17.9% YTD

Monday's Economic Reports:

October's Wholesale Inventories showed a 0.2% month-over-month increase, matching the KR Forecast consensus of 0.2%. This follows September's 0.2% decline, suggesting a modest rebound in inventory levels.

Tuesday's Economic Calendar:

The day begins with the November NFIB Small Business Optimism Index at 6:00 ET, with the previous reading at 93.7.

At 8:30 ET, we'll see the revised third-quarter productivity and unit labor costs data:

- Q3 Productivity is expected to hold steady at 2.2%, according to KR Forecast

- Unit Labor Costs are projected to remain at 1.9%, per KR Forecast

WaveTech Database

The short-term database shows increasing market weakness, with 1,770 exits against only 379 new entries, pushing the bullish percentage down to 46.04%. This movement is particularly noteworthy as we approach the critical 42% threshold - a level that historically signals more substantial selling pressure when breached.