Stock futures fall as cautious tone prevailed following strong start to Q4

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Stock futures fall as cautious tone prevailed following strong start to Q4

After a strong start to the fourth quarter, U.S. stock futures fell as a cautious tone prevailed.

The Dow Jones Industrial Average DJIA increased by 825 points, or 2.8%, to 30316, the S&P 500 SPX increased by 113 points, or 3.06%, to 3791, and the Nasdaq Composite COMP increased 361 points, or 3.34%, to 11176 on Tuesday. The Nasdaq Composite was up 5.7% from its 52 week closing low, but it remains down 28.6% for the year to date.

Wall Street was on course for a mild pullback, as futures suffered some selling after a strong rally over the past two sessions.

The S&P 500 has enjoyed its largest two day gain since April 2020, and the best start to a quarter since 1938, according to Dow Jones Market data.

The bounce followed three quarters of declines, the worst since 2008, during which the S&P 500 fell 24.8% to a near two-year trough as investors worried that the Federal Reserve's rate hikes to crush inflation would harm the economy.

Recent soft U.S data, covering job openings and manufacturing, has encouraged traders to trim bets on aggressive Fed hiking.

A week ago, markets predicted that the U.S. interest rates would peak at nearly 4.8% by April 2023, but that figure has fallen to 4.5%.

Johanna Chua, Chief Asia economist at Citi, said that the market risked being wrongfooted by any signs that interest rates could peak, even though U.S growth remained in better shape than other countries and Fed officials continued to sound hawkish.

Chua said that even though the overall setup has not changed trimming of bearish risk bearish rates bullish USD positions has caused a sharp reversal.

Oversold conditions and overly bearish sentiment was a key factor in the latest advance, which was endorsed by Tom Lee, head of research at Fundstrat, though he accepted that bulls may be chastised by the recent past.

The gains over the past two days have been seen as a bear market rally, due to the poor win-ratio for rallies in 2022, according to Lee, a note to clients.

Lee says that the positive run could continue due to a number of factors that could lead to a positive run.

These included a dip in Fed fund futures, a 5% pullback in the dollar index DXY, and the VIX volatility index VIX, moving back below 30 with Vix futures back in contango.

Since 1996, the Nasdaq 100 has been 100% bid Tuesday, and 6 of 6 times the Nasdaq 100 is higher 6 M and 12 M later with average gains of 27% and 34%, Lee said.

The ADP report sets the market for heightened nervousness when the key non-farm payrolls data is published at the end of the week.

Stephen Innes, SPI Asset Management's managing partner, said all eyes are on the employment data on Friday, which has priced in tremendous one day volatility in the options market.