This coming week is the last week of the worst six weeks of the year period but that does not mean the future path is paved with gold bricks.
This may be the last week of that normal volatility period but being an election year we may have some added volatility in the two weeks that follow. Since 1980, the week after the first presidential debate has been negative 83% of the time. The average decline is -1.8% for the Dow and -1.5% for the S&P. The Monday night debate is going to have about 100 million viewers, or the equivalent of a Super Bowl only with no commercials. The following week has two debates on Oct 4th and 9th. Assuming there is a clear leader after the third debate the market should go directional. Notice I did not say that direction will be higher.
Clinton is seen as the status quo candidate and that is normally good for the market except that she is talking about price controls on drugs and nearly shutting down the energy sector. While those efforts would require congressional approval, which is not likely to be approved, just the constant talk about the plans between now and the election could be enough to send the sectors into a nosedive. If Trump is leading the energy and defense sectors should rally strongly.
I could speculate for another dozen paragraphs but it would just be speculation and no guarantee of the future. There was a relief rally after the Fed decision but it was lackluster and slow to start on Wednesday. Once started the short covering kicked in and we ended with a decent gain. The overseas markets were up Wednesday night on the Fed decision and the decision by the Bank of Japan. The big 2-3% gains in Europe translated into a gap open on Thursday in the U.S. markets but that opening print was the high of the day, except for the Nasdaq, which closed at a new high.
Friday's profit taking was expected and I wrote about the potential on Thursday evening. The Apple, Facebook and oil price declines only accelerated the move lower.
Now that the initial profit taking is out of the way, the focus turns to Monday's debate and the potential repercussions for the rest of the week. There is also a flood of 13 Fed speeches that will be contradicting each other on what they believe is the right monetary policy.
The headlines from these items may not be enough to cause any real market decline but they probably will not create the conditions necessary for a lasting rally. Uncertainty will continue for at least another week.
The Russell 3000 is the broadest representation of the market and it failed to retest the prior high at just below 1,295 and the index fell back into the middle of the prior consolidation range to come to rest on support at 1,283. The midweek gains were strong but they faded fast on Friday. In reality, we are right back to where we have been trading for the last six weeks. The eight-day decline has been erased but the momentum faded quickly.
The Nasdaq 100 big cap index was the hero for the week with a surge to a new high at 4,891 that was 60 points over the old high set on September 7th. The Friday decline erased half of that expansion with a -32 point loss thanks to Apple and Facebook and the semiconductor stocks that supply Apple. If the Nasdaq could hold its gains it would be positive for market sentiment. However, the reports of slower iPhone sales and slower chip orders could have a lasting impact on the index.
The relationship between the Nasdaq and the Semiconductor Index has been documented before. This is a weekly chart and the impact to the semi stocks on Friday has not been felt because of the overall gains for the week. If the $SOX rolls over it will drag the Nasdaq indexes lower.
The small cap S&P-600 almost made a new high and failed to give much back. The small cap strength could help market sentiment if that strength holds. The midcap S&P-400 was less bullish and did pullback to prior resistance, now support, at 1,549. The mid cap index would be the middle of the market and it is showing only mediocre strength.
Another potential weight on the market is the price of oil. With the Algerian energy conference Monday through Wednesday and the potential for negative headlines about a production freeze, we could see prices drift back towards $40. However, if there are positive headlines it would produce a market bounce. Oil prices have a lot of influence on equity prices. There are hundreds of oil companies from the very small to the very large and they all move in concert with oil prices and manipulate the indexes.
Fortunately the dollar has been relatively tame over the last several weeks and that allowed oil prices to remain locked in the $43-$48 range. Without a rate hike the dollar should remain dormant for the next several weeks.
We are not in control of our own fate next week. It will be dictated by the debate, Fed speakers, the Algerian energy headlines and whatever hangover we get from the Apple news. The market is back in the neutral zone on the big cap indexes and until those headlines clear we are likely to stay in that range or decline if the headlines are negative.
Keep your eyes on the headlines and your finger on the exit trigger while the markets are open.
Enter passively and exit aggressively!
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