Santoli: Dip-buyers swoop in to save the major indexes from lasting damage

Published Tue, Jan 11 20221:13 PM EST

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. The dip-buying muscle was flexed at yesterday's lows and remains active, with investors grabbing at the most oversold growth/speculative stocks and allowing the broad indexes to avoid much damage to longer-term trends. At yesterday's low, the S & P 500 stretched to a 4.9% decline from its recent high and just like that the "buy them down 5%" reflex kicked in. JPMorgan's trading-desk recap says retail flows to buy were heavy on the pullback, which also punched below the 50-day average. Index already running up to check out the 4,700 level that the bulls in recent days were hoping would hold on the downside and which was the top of the old trading range. The Nasdaq Composite , for its part, hit the down-10% threshold and ducked under its 200-day average before bouncing hard, with recovery and outperformance continuing today. All this amounts to a market that had undergone a warp-speed rotation toward real-economy/higher-yield plays and away from multi-year-winner/expensive-secular-growth stocks that went a bit too far in the short term. A bit of recovery in growth vs value (1 percentage-point outperformance today but still -4pp YTD). Doesn't change the overall view of a market trying to reprice for a fast-receding omicron wave and a Fed reoriented toward tighter talk and probably action. Treasuries relaxing a bit today. Two-year Treasury hit 0.93% earlier, now settled back a bit, and the 10-year is a bit under the springtime highs near 1.8%. All assets catching a breath after factoring in a good deal of Federal Reserve action in a hurry. A few things remain relevant: Real yields remain negative, just a bit less so. The market has done a fair bit of the Fed's work so multiple hikes this year won't be a shock and three hikes might even qualify as dovish surprise. Inherently, going from an unchanging Fed stance to a tightening posture as an economy decelerates will raise the chance of either a mistake or (more likely) waves of uncertainty about the prospect of a mistake. Credit markets have shown very little alarm. As earnings season gets moving, valuations have compressed in the large-cap universe outside the mega-caps that skew the S & P and Nasdaq 100 . Not cheap but a lower bar for sure. Fed Chair Jerome Powell didn't give too much in the way of concrete guidance on policy next steps, but wouldn't be expected to. Balance-sheet reduction could go faster or slower based on evolving conditions. Tough talk on inflation is the easy way to go now, while preserving flexibility to see what the numbers actually do. They've ramped market-implied expectations from 1-2 2022 hikes to 3-4 with modest damage to the benchmark equity and credit gauges, while skimming a ton of froth off the wilder parts of the market. Still unclear if the market is merely responding to oversold conditions – particularly in washed-out IPOs (+3% today), SPACs (+2%) and ARKK (+3%), but they're due for some relief. As noted yesterday, small-cap growth has gone from super-expensive vs the S & P 500 to cheapest in many years (based on price/sales ratio) in a matter of several months. Market breadth is solid today solid, 3:1 to the upside. Equal-weight S & P lagging as the Nasdaq megas hold the baton. VIX back under 19, created another constructive spike on the chart, though a smaller one that from recent 5% selloffs. Unclear how much clearance this will offer but shows not much panic/stress or badly trapped capital on this rotational churn so far this month.

Traders wearing face masks work on the trading floor at the New York Stock Exchange (NYSE) as the Omicron coronavirus variant continues to spread in Manhattan, New York City, U.S., December 20, 2021.

Andrew Kelly | Reuters

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics.

The dip-buying muscle was flexed at yesterday's lows and remains active, with investors grabbing at the most oversold growth/speculative stocks and allowing the broad indexes to avoid much damage to longer-term trends.