The stock market's GDP-inspired rally met with a ghoulish demise. Traders were scared by negative economic data centered on the consumer. October is the yearend for many funds that could be trying to lock in gains after two strong quarters. The U.S. dollar has reversed again and today's rally in the currency is putting pressure on commodities.
Asian markets were up as investors reacted to yesterday's GDP rally in the U.S. Investors sentiment was bullish as the ChiNext market's debut went off with a bang. Most of the ChiNext's 28 stocks doubled on the first day of trading. The Chinese Shanghai index rose 1.2% but failed to close above round-number resistance at the 3,000 mark. The Hong Kong Hang Seng, which has been plunging these last three days, delivered a strong 2.2% bounce. The Japanese NIKKEI also snapped a three-day losing streak with a 1.45% gain.
The story was a lot different in Europe. Yesterday's bounce looks more like a speed bump on the way down. Investors ignored a report that British consumer confidence rose to new 20-month highs in October. The English FTSE lost 1.8%. The French CAC-40 gave up 2.8%. The German DAX plunged 3.0%, completely erasing yesterday's bounce.
Yesterday the U.S. stock market rallied sharply on a better than expected GDP report. I warned readers that the reaction seemed overdone and the talking heads on TV were a little too giddy about it. Everyone knows that the Achilles heel to this recovery is the consumer. That's why today's negative reports on consumer sentiment and consumer spending have driven a stake through the heart of yesterday's rebound.
The Reuters/University of Michigan survey of consumers released their final October reading on consumer sentiment. September's reading was revised higher from 69.4 to 73.5. October's final read came in at 70.6. Delving inside the report the survey reveals that the gauge of consumer expectations fell from 73.5 to 68.6. October marked the 13th month in a row that consumers said their financial situation declined.
According to the press release this was the "longest and deepest decline in the sixty-year history of the surveys. The fewest consumers ever recorded cited income gains in the October surveyâ€”just 12%, about one-third the level that reported income declines (32%). Moreover, for the first time in sixty years, the majority of families expected their incomes to remain unchanged or to decline during the year aheadâ€”and that record was repeated in every monthly survey conducted during 2009."
The government's reading on consumer spending didn't help matters. Spending fell 0.5% in September. This was the first drop in five months and the largest decline since January. Consumers are still worried about job security and instead of spending they're saving money. That's not good news for an economy where the consumer's slice of the pie chart has reached 70%.
I would keep an eye on the dollar. Today's bounce is erasing a lot of yesterday's reversal and should the dollar breakout above resistance the commodity stocks could really accelerate lower. There are so many investors that have been short the dollar that short covering could last a while. The mining stocks are getting hammered. The XAU gold & silver index is off 4.7%. Energy stocks are also hurting. The dollar's rally has pushed oil to a 3% decline. The OSX oil services index is off 4.0% and the OIX oil index is down 3.0%.
Meanwhile financials are getting hit hard as investors worry that CIT will eventually succumb to bankruptcy. CIT's stock has fallen to 77 cents as the company struggles to complete a debt exchange. CIT has a lot of debt that comes due early next week. The BKX banking index is off 4.29% and the BIX is down 3.2%. We're also seeing a lot of profit taking in technology. The DDX disk drive index has produced a bearish double top. More importantly the SOX semiconductor index is breaking down under psychological support at the 300 mark and technical support at the 100-dma.
Next week is going to be a big week for economic data. We'll get the ISM reports on manufacturing and services in this country. The Federal Reserve is going to hold another two-day meeting that concludes next Wednesday. There are actually seven central banks around the world that will release their stance on interest rates next week. Next Friday will bring the non-farm payrolls (jobs) report.
Let's take a quick look at charts for the major averages:
Chart of the S&P 500:
Chart of the NASDAQ:
Chart of the Dow Industrials:
Chart of the Russell 2000 index:
Chart of the U.S. dollar ETF (UUP):
Chart of Semiconductor index (SOX):
It's an ugly day for stocks. A quick look at the OptionInvestor.com play list reveals a big sell-off in the DIG. Our new aggressive plays from last night, POT and SLB, have been stopped out. Our bullish play on the volatility index (VIX) has hit our second target to take profits. Naturally our put plays are looking a lot stronger today. BMO is off 3.4%. RIMM has hit our first target to take profits at $58.55.