The S&P 500 was nearly flat as it only fell 2 basis points. It is still near the February low as it will likely remain in a tight range until tangible news about the trade war comes out and the Fed updates its 2019 guidance.

VIX was down 3.77% to 20.65. The CNN fear and greed index increased from 10 to 11. Nasdaq was down 0.39% even though Apple, Facebook, and Tesla increased 1.09%, 0.35%, and 2.78%. Russell underperformed dramatically as it fell 1.55%.

Regional Banks - Terrible Market Internals

Peak to trough the Russell 2000 fell 24% in 2015-2016. Its decline is currently 17.3%. I doubt the Russell 2000 will surpass that 2015-2016 decline without the S&P 500 falling below its February low.

On a year to date basis, the S&P 500 is only down 0.86% while 80% of Russell 2000 stocks are down. 40% of Russell 2000 stocks are down more than 2% and 25% are down more than 3%. Over 60% of S&P 500 firms are down and 65% of Russell 1000 firms are down.

The point here is the market internals are very bad.

As you can see from the chart below, the large caps are outperforming the mid and small caps by 710 and 625 basis points.

Regional banks are in disaster mode.

The KBW regional bank index fell 2.7% on Thursday which pushed it below the October low. It is at $49.45, while the October 24th low was $50.82. Peak to trough, the KBW index fell 28% in 2015-2016.

Currently, the decline in the KBW index is 23%. This implies economic weakness similar to 2016 is almost fully priced in. If you are shorting the regional banks here, you are betting on at least a small recession sometime in 2019 or 2020.

Regional Banks - Utilities Rally & Financials Fall

The best sectors were utilities and consumer staples which increased 0.88% and 0.69%. Even on days when the S&P 500 doesn’t crater we’ve seen the ‘risk off’ trade power on.

Out of all the sectors, the utilities have seen the greatest multiple expansion in 2018. That’s mostly because utilities had low earnings growth. But it’s also because this was a year where ‘risk off’ dominated.

All the months of gains in the middle of the year have been wiped away by the recent volatility which changes how historians will review this year.

The worst sectors were the materials and the financials which fell 1.13% and 0.59%. It’s interesting to see the financials weak because the yield curve steepened.

The difference between the 10 year yield and the 2 year yield is 15 basis points and the chance of a rate hike on December 19 is 80.1%. With the market stable, the rate hike is being locked in.

As you can see from the chart below, the correlation between the yield curve and consumer confidence is extremely high.

If the correlation continues, consumer confidence should be strong for the next few months. The curve still has room to flatten before it inverts. It will steepen when the next recession starts which shouldn’t be for at least six months.

Regional Banks - Major Jobless Claims Reversal

The reason why I suggested the jobless claims spike in the past few weeks wasn’t enough to build a bearish thesis around is because it was a small increase for a volatile metric.

This suggestion was proven correct as it fell 27,000 to 206,000 as you can see from the chart below. Calls for a recession in the next few months based on this metric will stop now.

The previous week’s report was revised up 2,000 to 233,000, but this was still an amazing report. It beat estimates for 228,000 and the lowest estimate which was 225,000. The four- week average fell from 228,500 to 224,750.

This report was the fourth best in this cycle as the cycle low in September was 202,000. Last week we were talking about the level it would need to hit to signal a recession. Now we are talking about how it can hit a new cycle low soon.

Continuing claims from the week of December 1st were up 25,000 to 1.661 million. The 4 week average was 1.666 million which is 23,000 higher than it was at the start of November. The unemployment rate for insured workers increased 0.1% to 1.2%.

Regional Banks - Import And Export Prices

November import prices were down 1.6% month over month. This missed estimates for a 1% decline and the 0.5% gain in October. Import prices were up 1.8% year over year which was well below the 3.1% gain in October.

Month over month export prices were down 0.9% which missed estimates for a 0.1% gain and the prior report which had a 0.5% gain. Yearly growth fell from 3.5% to 0.7% as you can see from the chart below.

As you probably suspected, this price decline was caused by energy price weakness.

Petroleum import prices were down 12.1%. Without this, monthly import prices were down 0.3%. Import prices of finished goods were flat monthly. Industrial supplies prices were down sharply.

Export prices for industrial supplies were down 3%; export prices for finished goods were down slightly. Year over year agricultural export prices fell 1.7%.

As you can see from the chart below, the tariffs haven’t affected imports from China. But they have caused exports to China to crater. This implies America is losing the trade war. China’s soybean purchases from America have dried up.

Regional Banks - Conclusion

Even though the yield curve steepened slightly, the regional banks cratered.

The market internals either signal the stock market is very close to a bottom or that there will be a recession in the next few quarters. It’s a tricky scenario because stocks are doing poorly much earlier than normal if there is a recession in 2020.

As the jobless claims showed, the labor market is still strong. Other than the stock market, the leading indicators aren’t showing any issues.

The leading indicators’ growth rate is peaking, but as long as growth is still positive, there probably won’t be a recession and there shouldn’t be a bear market. Small caps are almost already in a bear market.