Stock Market Tug-of-War Points to Bottom for Select Small-Cap Stocks

U.S. stock prices, as well as stocks of companies that trade on the world’s other major equity exchanges, were very volatile over the past several trading days, as a tug-of-war occurred between optimistic and pessimistic stock market participants.

Although numerous so-called financial market “experts” who appeared on broadcast financial shows over the past few days claimed that there was no good explanation for that volatility, I wasn’t the least bit surprised by the extreme intraday price fluctuations in stocks.

That’s because stocks have historically been very volatile near major turning points in the financial markets due to this type of tug-of-war.

Looking forward, I expect stocks to continue to be volatile through January 4, 2019, but for the intraday fluctuations in stocks to narrow during the week ahead.

My research continues to indicate that stock prices in general will continue to trend lower over the next few months in response to a continuation of the recent slowing in the pace of economic growth in major regions of the world.

Nevertheless, that same research suggests that the small-company stocks that compose our model portfolio have already bottomed or are very near a bottom.

In regard to recent economic developments, the U.S. Department of Commerce reported on December 21 that new orders for durable goods rose during November at the slowest rate since June, and that new orders for non-defense capital goods (excluding the volatile aircraft industry), which serve as a proxy for business investments in equipment, machinery and operating facilities, declined during November for the third time in the past four months, falling by 0.6%, as compared to the prior month.

That’s a negative development because orders of durable goods and non-defense capital goods have historically served as reliable leading economic and stock market indicators.

Separately, The Conference Board reported on December 27 that its Consumer Confidence Index, which is based on responses to its monthly survey of Americans regarding their personal financial situations, job prospects and outlook for the U.S. economy, declined during December to the lowest level since July of this year, indicating that Americans, in the aggregate, have become less optimistic about those factors.

The worsening in Americans’ economic sentiment bodes poorly for the near-term future direction of U.S. stocks, as such stocks in general tend to move in the same direction as The Conference Board’s Consumer Confidence Index.

Problems abroad

In regard to recent economic developments abroad, the European Commission reported on December 21 that its mid-December survey of Western European households indicates that the economic sentiment of people who live in the Eurozone deteriorated during December to the lowest level since February 2017.

That substantial worsening in economic sentiment suggests that European households will rein in their spending during the months ahead and that the Eurozone economy will therefore continue to weaken, as household spending accounts for a large portion of the region’s gross domestic product.

Separately, Japan’s Cabinet Office announced on December 26 that its index of leading economic indicators for Japan declined during October, the latest month for which data are available, to the lowest level since June 2016, indicating that the country’s economy continued to contract during the fourth quarter of this year.

And, Japan’s Ministry of Economy, Trade and Industry reported on December 27 that sales at the country’s retail stores, and industrial production at its factories, mines and utilities, declined during November, which also suggests that the country’s economy continued to contract over three months ending December 31, 2018.

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