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Oversold Stocks Have Room To Rally, But Macro Worries Get In The Way

Volatility has picked up in US stocks. This is a perfect environment for traders who are nimble enough and ready to take ones and twos, quickly locking in what markets give them.

It is increasingly becoming clear why stocks began selling off last October, and why selling accelerated in December. From an unexpected drop in South Korean exports to weaker-than-expected Chinese and US manufacturing, it seems the global economy meaningfully downshifted in December.

In the US, the ISM manufacturing index fell 5.2 points month-over-month in December to 54.1, which was the lowest since November 2016. The m/m drop was the widest since October 2008. A collapse in new orders was the main culprit. Orders declined 11 points m/m to 51.1. Backlog of orders fell as well, down 6.4 points m/m to 50. The only saving grace was customers’ inventories, which edged up two-tenths of a point m/m to 41.7. That said, manufacturers’ inventories were still north of 50, down 1.7 points m/m in December to 51.2. As a result, the orders-inventories spread went negative last month, although by a touch (Chart 1).

Macro-wise, things look very fluid.

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