Recent Gains Cut in Half on Trade, Yield Curve Fears

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The December episode of the Zacks Ultimate Strategy Session will be available for viewing no later than Wednesday, December 12. Kevin Matras, Sheraz Mian, Brian Bolan and Jeremy Mullin cover the investment landscape from several angles in this popular event.

Don’t miss your chance to hear:

• Brian and Jeremy Agree to Disagree on whether it’s time to buy FANG stocks again

• Kevin answers your questions in Zacks Mailbag

• Sheraz and Brian choose one portfolio to give feedback for improvement

• And much more

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Every time the market rallies after getting some good news, volatility rears its ugly head again and we end up giving most of it back. It happened again on Tuesday. Stocks had been on the rise of late due to favorable developments on interest rates and trade, but today the major indices returned approximately half of the recent advances.

The NASDAQ plunged 3.8% (or more than 283 points) to 7,158.43, while the S&P was off 3.24% to 2700.06. The Dow slipped 3.1% (or nearly 800 points) to 25,027.07. Stocks ended near the lows of the session. These indices had each jumped approximately 6% in the previous 6 trading days.

After such a strong runup, one would expect the market to give some of it back. But the extent of this selloff was surprising. The main problem was the flattening yield curve, bringing the yield spread between the 2- and 10-year Treasury bonds closer to an inversion. Markets have been worried about an economic slowdown for a while now, but that move shifted their concern into a higher gear.

And further complicating matters, it seems that the good feelings from the G-20 have already waned. It doesn’t help that President Trump was again talking tough on trade via Twitter, even calling himself a “Tariff Man”. That 90-day delay in additional tariffs feels even shorter now, especially since the clock apparently started ticking on Dec 1 instead of waiting until Jan 1.

What a difference a day can make! We were feeling pretty good yesterday, but this October-like selloff sapped a lot of that enthusiasm. The media will probably be talking more about the possibility of a recession now, but its important to note that the yield curve did NOT invert. And we’ve survived tons of tweets from the President. Hopefully, we can recover the ground lost today and then some during this historically strong month for the market. Looking forward though, it does make the Fed’s future rate hike plans all the more important.

Today’s Portfolio Highlights:

Stocks Under $10: On a day like today, stocks that manage to close on the positive side stick out like a green thumb. Case in point, while the market was selling off by more than 3%, Fluidigm Corporation (FLDM) gained 1.63%. This Zacks Rank #2 (Buy) operates as a biotech tools company that creates microfluidic-based chips and instrumentation for biological research. Brian Bolan was most impressed with this company’s resilience today given that there is a 16% short interest position, so he added it to the portfolio. Read his full write-up for a lot more on FLDM.

Surprise Trader: Talk about bucking the trend! Not only did Restoration Hardware (RH) gain ground during a sharp selloff on Tuesday, but it jumped by 10.9% after a solid quarterly report. This luxury home furnishings company reported earnings per share of $1.73, which crushed the Zacks Consensus Estimate of $1.27 by more than 36%. It marked the 10th straight positive surprise and brings its four-quarter average beat to 23.5%. Revenues of $638.5 million also topped our expectations at $633 million.

Zacks Short List: This week’s adjustment included three changes. The short-covered stocks that left the portfolio included:

• Schlumberger (SLB)

• Baidu (BIDU)

• Cheniere Energy (LNG)

The new buys that replaced these names are:

• Atlassian Corp. (TEAM)

• Int’l, Ltd. (CTRP)

• National Vision Holdings (EYE)

Learn more about this emotion-free portfolio that takes advantage of falling and volatile markets by reading the Short List Trader Guide.

Insider Trader:“With everyone panicked over the possibility of a recession, they are selling and asking questions later.

“We got the ISM for Manufacturing number yesterday. It was 59.3. That does NOT signal a recession. That is a hot number. We’re getting other economic data this week as well.

“Sorry to tell the bears, but I expect another solid employment report (Friday) (based on solid weekly jobless claims data). Other data, including consumers still spending freely this holiday season, indicates that the economy is simply not as bad off as the financial media and Wall Street is acting like it is.

“For a refresher about what a slowdown looks like, look back at the end of 2015 and beginning of 2016 for the manufacturing recession. The ISM for manufacturing did fall under 50, which means contraction.

“The data has to get much worse. Watch the data.” — Tracey Ryniec

All the Best,

Jim Giaquinto

Recommendations from Zacks’ Private Portfolios:

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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