Need to Know: Here’s why the stock market is a ‘hot mess’ — and how January could calm the chaos

Aliens landing in New York last night would be an almost fitting end to the wild Christmas week Wall Street has seen.

But alas, most everything has an explanation, like the transformer blowup that temporarily turned Manhattan skies an eerie-blue green. As for stocks, there seems to be more than one culprit behind the holiday volatility eruption.

Blame passive — sticking money in an index fund — and momentum — buying the winners, selling the losers — investors for these market swings, David Kelly, J.P. Morgan Asset Management’s chief global strategist, said on a call Thursday.

Direction in a stock market bereft of big players, is definitely not “being decided and determined on a day-today basis by millions of little Warren Buffetts thinking carefully about the value of stocks. It was never quite like that and it’s not like that today,” says Kelly.

The good news, he says, is that unless the swings are “validated by actual weakness in earnings or increases in interest rates…then they will fade,” and it’s probably time to buy.

The new year will bring the real test for stocks, says our call of the day, from Northman Trader’s Sven Henrich. “Earnings coming in January will likely not show the crisis markets appear to have priced in. If anything, in the short term, valuation excess has been removed by this correction,” he says in an email.

Henrich says markets have been experiencing “multiple factors interjecting into thin market conditions: tax-loss selling and fund outflows on the one hand, and fund rebalancing and pension fund inflows on the other hand.”

Indeed, a Wells Fargo report that says U.S. defined-benefit pension funds need to buy $64 billion in equities before year-end has been blamed in part for the wild ride by ZeroHedge and others. Those purchases are needed to balance big divergences between bond and stock performances.

Pension funds + you’re-no-Warren-Buffett passive funds and momentum players + juniors manning the desks = mayhem on Wall Street this week.

Last word goes to Cracked Market’s Jani Ziedins who says investors should look past all the noise and focus on the fact the S&P 500 continues to hold the 2,400 level. Should that give way, then “who knows where the bottom would be,” he said in a blog post.

“But if we hold this level for several days, then skittish dip-buyers will start testing the waters and putting a bid back into markets,” says Ziedins.

The market

Dow YMH9, +0.51% S&P 500 ESH9, +0.52%  and Nasdaq NQH9, +0.42%  futures have swung higher. That’s after Thursday’s zigzag action that ended positive for the Dow DJIA, +1.14% S&P 500 SPX, +0.86%  and Nasdaq COMP, +0.38%

The yield on 10-year Treasury notes TMUBMUSD10Y, -0.33%  is climbing, last at 2.7577%. The dollar DXY, -0.37% is down, gold US:GCU8 is higher and crude US:CLU8 is bouncing back ahead of supply data.

Check out Market Snapshot for more coverage

Europe stocks SXXP, +1.69%  are surging, but in Asia, the Nikkei NIK, -0.31%  retreated and the Shanghai Composite SHCOMP, +0.44%  only managed mild gains.

Read: Why stock-market investors fear historic rebound was just a ‘wicked bear trap’

The chart

While some might like to blame POTUS for the stock market meltdown seen in the latter part of this year, and to be sure his Twitter attacks on Fed Chair Jerome Powell haven’t helped, our chart of the day, from Pragmatic Capitalism’s Cullen Roche, paints a different picture.

In a recent blog post, Roche posted this chart of the S&P 500, overlaid against the MSCI All World Index, a widely followed measure of global stock performance. It shows the two, tightly correlated, but also a pullback that began in January, way before Trump’s tweet tirades really heated up.

Pragmatic Capitalism

“And that’s the problem with the ‘Trump made the stock market crash’ narrative – if he made U.S. stocks crash then he must have also made the entire global stock market crash. Does anyone really believe the president of the U.S.A. is the main influencing factor in global stocks?” asks Roche.

So why have stocks taken a hit this year? “Because in order for them to rise in the long-term sometimes they need to fall in the short-term,” he says, adding that that’s just how markets work sometimes.

Don’t miss: Finance Twitter: The 50 most important people for investors to follow

The buzz

Watch shares of Aphria APHA, -4.30% APHA, +0.13% which were halted late Thursday after soaring on news U.S. marijuana producer Green Growth Brands GGBXF, -6.41%  is eyeing a hostile takeover of Canada’s largest cannabis producer. The bid is being backed by a wealthy and powerful Ohio family.

The Yankees are in reportedly talks with Amazon AMZN, -0.63%  and Sinclair Broadcast SBGI, -0.49%  about teaming up to buy the baseball club’s regional sports network YES.

Fighting a defamation lawsuit, Tesla TSLA, -3.05%  CEO Elon Musk says he was only kidding when he called a British cave diver a “pedo.”

Sears could face liquidation if Chairman Eddie Lampert doesn’t come forward with a $4.6 billion buyout proposal, before a Friday deadline.

Read: Stock market’s wild swings can teach you valuable money lessons

The economy

The Chicago purchasing managers index will be released this morning, along with pending home sales, but advance trade in goods data will be delayed, due to the partial government shutdown.

Random reads

A transformer blowout panicked New Yorkers and produced some cool pix and videos

Adoption offers pour in from all the world for abandoned dog seen being dumped in heartbreaking video

Delta flight attendant’s dad books six flights to ensure she wasn’t alone for Christmas

Hackers gained details on 1,000 North Korean defectors

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