After Fed shock, S&P 500 needs to shed 10% before it hits bottom, says strategist

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The worst December for stocks since 1931? Call off Christmas already.

Investors are still staggering this morning, a day after that coal-in-your-stocking move — to some — by Fed Chairman Jerome Powell & Co.., who defied nearly everyone from POTUS to your Uber driver, by hiking rates and not sounding quite dovish enough over future moves:

As it stands, the Dow is looking at its worst December return since the Great Depression, unless the waning days of the month produce a Christmas miracle.

So what now? Cutting your losses and heading for the holiday hills doesn’t sound like such a bad idea. Our call of the day, from Scott Redler, partner with T3Live.com, thinks another 10% will need to come off this market before investors should start “putting any long-term money to work.” A drop from Wednesday’s close to 2,255 would represent a roughly 10% fall.

For this market to move forward, he echoes some other strategists who have been saying the market needs to flush out a few more sellers and find a solid bottom to rebuild from. He’s looking at that bottoming out to come around 2,250 to 2,300 for the S&P, basing that on a so-called head and shoulders technical pattern, shown in this chart:



Speaking to MarketWatch, Redler says one problem with this market is that it has been opening consistently higher, then selling off by the day’s end, when in reality the S&P 500 needs to see a “morning flush that turns into a strong close” to start building up.

Redler adds that investors shouldn’t get too worked up by what happens over the next week, because any dips will need to be retested when traders return from holidays. He expects the first quarter could see that big test of those lows he’s looking out for.

The Fed has now reached nine hikes in the tightening cycle that began in December 2015, notes Russ Mould, investment director at AJ Bell. “Uncannily, nine is the average number of rate hikes that it has taken to puncture U.S. stock market bull runs across the eight peaks in the S&P 500 since 1970,” he told clients in a note.

“A huge bull case for stock markets in the U.S. and world-wide was the TINA mantra – ‘There Is No Alternative,’” Russ Mould, investment director at AJ Bell told clients.

“The problem now is that improved returns on cash and a U.S. 10-year Government bond yield of 2.75% mean there are now more options on the table for investors, especially if they are naturally risk-averse or have had their fingers burned by riskier choices earlier this year,” he said.

And Wall Street’s expectations for 2018 seem like a thousand light years ago:

The market

Dow














YMH9, +0.19%












 S&P 500














ESH9, +0.23%












and Nasdaq-100 futures














NQH9, +0.35%












are bouncing around after Wednesday’s session saw the Dow














DJIA, -1.49%












S&P














SPX, -1.54%












 and Nasdaq














COMP, -2.17%












 mark fresh 2018 closing lows.

Crude














CLH9, -2.74%













CLH9, -2.74%












is deep in the red. The dollar














DXY, -0.66%












 and gold














GCZ8, +0.26%












 are down. In Asia, the Nikkei tumbled hard, while European markets














SXXP, -0.89%












 are also underwater.

Sweden’s Riksbank also hiked rates, for the first time in seven years — to negative 0.25%, though. The krona














USDSEK, -1.7884%












 is climbing nicely.

Check out Market Snapshot for more coverage

The Santa rally is looking alive for bitcoin














BTCUSD, +9.99%












up 10% and atop the $4,000 mark.

Read: Peter Schiff says this is no bear market, it’s a ‘house of cards that the Fed built’

The charts

Unloved stocks were the dark horses in a tough 2018 for investors. That’s according to our chart of the day comes from John Butters, senior analyst at FactSet. He did some number crunching to find out how analysts have performed in terms of their buy ratings on S&P 500 companies this year.

FactSet


FactSet divided stocks that were in the S&P 500 as of Dec. 31, 2017 into five, equal-sized groups (quintiles) based on the percentage of buy ratings from that start date. The 20% of stocks with the lowest percentage of buy ratings at the start of the year saw the highest average total return, a gain of 3.5%. They also had the highest median total return of 4.3% to date of the five groups.

The best performer of the unloved stocks? TripAdvisor














TRIP, -2.26%












with Chipotle














CMG, -3.77%












McCormick & Co.














MKC, -2.56%












Under Armour














UA, -4.37%












 and Macy’s














M, -2.06%












 also putting in dent performances. And in an example of where analysts got it really wrong, Mohawk Industries














MHK, -1.19%












which is lumped in the 20% group of stocks that had the highest percentage of buy ratings.

The buzz

Tilray














TLRY, -7.19%












 is up after announcing a deal with Anheuser-Busch














BUD, +0.07%












 to research cannabis drinks.

Facebook














FB, -7.25%












 was on the defensive again in the aftermath of the uproar over a report it allowed intrusive access to its user data.

Watch Allergan














AGN, -6.95%












Glaxo














GSK, +0.84%












Amgen














AMGN, -0.86%












 and other pharma companies over reports they may raise drug prices in 2019.

Nike














NKE, -3.06%












 will report after the close Thursday and analysts are bullish, but worried about a hit from tariffs. Walgreens














WBA, -2.90%












 is also on tap.

Read: Blue Apron drops below $1 a share, now down 80% this year

The economy

Weekly jobless claims, the Philly Fed and leading economic indicators are en route this morning.

The Senate OK’d a short-term spending bill that will keep the U.S. government open until early February, pushing the battle over funding a border wall to the new year.

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Democrats reportedly toyed with Russian online tactics in a 2017 Alabama-Senate runoff

Drone ruins travel plans for U.K. travelers, shuttering Gatwick airport

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