That's it, folks. Fed Chairman Ben Bernanke just wrapped up his speech and the crowd goes wild! Oh, wait... where is everyone? The highly anticipated Jackson Hole speech by Mr. Bernanke on Friday failed to have much impact on the stock market. There was some volatility on Friday morning but equities continued to churn sideways without much fanfare.
Overall it was a pretty quiet week. There was some perceive weakness early in the week thanks to negative comments from the International Monetary Fund (IMF) on the challenges it sees in the current bailout plan for Greece. Then there was the bearish comments from the Slovak Prime Minister who said there was a 50/50 chance the Eurozone would breakup. Economic data was actually somewhat benign. German unemployment was unchanged at 6.8%. Yet Spain's unemployment has risen to 25% with those under 25 years old at 53% unemployment. Same-store (retail) sales in the U.S. were generally positive yet retail sales in Japan were weak.
We did see shares of Apple Inc. (AAPL) tag a new all-time high near $680 on Monday following news of its legal win versus rival Samsung in a huge patent infringement case. Some of the big, high-profile technology names are showing strength with Google (GOOG) and Amazon.com (AMZN) trading near all-time record highs. Yet Facebook (FB) continues to sink with the stock down another -5.3% on Friday and closing at a record low near $18. FB's IPO price was $38.
Some of the positive economic reports helped buoy the market. The U.S. Q2 GDP revision came in at +1.7% up from the prior estimate of +1.5%. The Federal Reserve's Beige Book report, with anecdotal reports from all twelve districts, suggesting the U.S. economy continues to grow at a gradual pace. The Case-Shiller 20-city home price index rose +0.5% in June compared to analysts estimates for a -0.3% decline. The pending home sales report increased +2.4% in July versus estimates for an unchanged reading. Factory orders grew +2.8% in July compared to estimates for +1.8% growth. The final look at the University of Michigan's consumer sentiment survey for August was revised up to 74.3 from 73.6. Analysts had originally projected a drop to 72.5. July's reading was 72.3.
In the worse than expected column was the Chicago PMI which came in at 53.0 versus estimates for 53.5. The prior month hit 53.7. Numbers above 50 indicate growth and under 50 indicate contraction. The initial weekly jobless claims ticked higher to 374,000 over estimates of 370,000. Personal income rose +0.3% in July, which was in-line with estimates. Yet personal spending only rose +0.4% against estimates of +0.5%.
The real headline for the week was Bernanke's speech on Friday. I'm sure you are sick of hearing about it. Yet the stock market has been rising for weeks on expectations that the Federal Reserve would announce some new form of stimulus. Sure enough after a 24-page speech Bernanke finally delivered on the last page with his comments that the Fed "will provide additional policy accommodation". He did not say when or how this new stimulus will take place. I am surprised that stocks did not sell-off. The lack of details could have been an excuse to sell. Actually after months of expectations for new stimulus the market could have seen a "sell the news" type of move. The fact that stocks did not sell-off could be seen as positive.
Bernanke remains focused on the stagnant U.S. labor market and plans further stimulus to help fuel hiring. A pessimist could argue that the Fed has been trying to use monetary policy to generate jobs for five years without much lock. How will the Fed buying more U.S. treasures to keep interest rates low generate new jobs when that tactic has not worked yet? It's a good question. Maybe Bernanke has a new strategy to deploy or maybe the market just doesn't care. The prospect of further stimulus from the U.S. central bank helped drive the U.S. dollar lower and that in turned fueled gains for some of the commodities. A weaker dollar means you have to spend more dollars to buy the same commodity. Oil, gold and silver all rallied on Friday but the metals saw the biggest moves. Silver is at a four-month high and gold is at a new five-month high. Meanwhile the yield on the 10-year U.S. treasury fell to 1.56%, a new three-week low.
The S&P 500 index is down -0.3% for the week. That follows the prior week's -0.5% decline. If you look at a chart the S&P 500 has been churning sideways in the 1400-1420 range for about four weeks. The 2012 highs are about 1420 so is this a top for the market? Or is the index merely consolidating prior gains before breaking higher? That's the real question here and it might depend on what happens in Europe over the next two weeks.
On a short-term basis there is support in the 1395-1400 zone. There is resistance in the 1420-1425 area.
If the market retreats I would look for additional support near 1380. If the market rallies past 1425 then I would look for resistance in the 1440-1450 area.
Daily chart of the S&P 500 index:
The NASDAQ Composite has been churning sideways in the 3050-31.00 zone for two weeks. Unlike the S&P 500 the NASDAQ has not yet tested its 2012 highs, which are in the 3130 area. A break higher probably sees a quick run to the 3130 zone. Meanwhile a breakdown should find the next level of support close by at 3,000.
Daily chart of the NASDAQ Composite index:
The Russell 2000 index ended the week with a -0.2% decline. The 820 level remains overhead resistance. A breakout past this level probably signals a run toward the 2012 highs near 850. Meanwhile on a short-term basis there should be support near 800 and then near 780.
Daily chart of the Russell 2000 index
The Dow Jones Transportation index continues to underperform and just posted another weekly decline. The transports are on the verge of a technical breakdown under the $TRAN's trend of higher lows. If the transports keep sinking it's going to be a brake on the wider market's rally attempts. This sector's weakness remains a caution flag for investors.
Daily chart of the Dow Jones Transportation Index
We have a very busy economic data and event month in front of us. The next two weeks could be like a roller coaster for the markets as they climb and plunge on headlines. This week is very busy in spite of the fact that the U.S. markets are closed on Monday for Labor Day. The ISM and ISM services data are both released this week. We'll also get the ADP Employment change report and the nonfarm payrolls (jobs) report. The jobs report comes out on Friday and current estimates are for a gain of +128,000 new jobs compared to last month's +163,000.
One of the biggest events of the week could be the ECB meeting on Thursday.
Looking ahead there is a lot happening the following week. September 12th is a big day with the start of a two-day FOMC meeting. Plus the German courts will vote on the ESM. There is also the Dutch general elections. Plus, Apple is widely expected to unveil the new iPhone 5 on Sept. 12th.
Economic and Event Calendar
- Monday, September 3 -
Democrat convention begins
U.S. markets are closed for Labor Day holiday
- Tuesday, September 4 -
ISM Index (for August)
Construction spending (for July)
Auto and Truck sales (for August)
- Wednesday, September 5 -
- Thursday, September 6 -
Weekly Initial Jobless Claims
Spanish bond auction
ADP Employment Change report
ISM Services (for August)
- Friday, September 7 -
U.S. nonfarm payrolls (jobs) report (for August)
Additional Events to be aware of:
Sep. 12th - German courts vote on constitutionality of ESM
Sep. 12-13th - (two-day) FOMC meeting
Sep. 12th - Apple expected to unveil the iPhone 5
Sep. 12th - Dutch general elections
Sep. 15th - Eurogroup meeting
Also in September, the IMF will release their review of Greece. Plus, the U.S. will likely hits its debt ceiling again.
The Week Ahead:
Looking ahead at the first week of September the market faces a lot of different forces potentially moving stocks. It's the beginning of the month and new money coming into mutual funds could provide lift. Historically the day after Labor Day tends to be up. Yet September is seasonally the worst month of the year for all the major indices. Although September's performance is probably better (less bad) in an election year since stocks generally grind higher into an election. We need to remember that the end of October is the year-end for many mutual funds. Money managers might start flushing their losers in September when they get back from summer vacation.
This week the focus will be on ECB meeting and U.S. economic data, specifically the ISM report on Tuesday and the jobs report on Friday. However, if the jobs report is too weak it might be seen as a positive since it helps pave the way for the Federal Reserve to launch stimulus sooner rather than later.
The ECB meeting on Thursday could be the wildcard. Weeks ago the market rallied when ECB President Mario Draghi said they would do "whatever it takes" to save the Eurozone. Yet since then there has been very little news or solutions on how the ECB plans to follow through on that promise. Draghi is still fighting with Germany's Merkel on how to implement any new plans on solving the Eurozone's crisis.
Draghi was supposed to speak at the Jackson Hole event this weekend but canceled at the last minute so he could focus on his work in Europe. Many analysts expect that Draghi will delay any big announcements until after the German courts vote on the constitutionality of the ESM European bailout fund, which happens on September 12th. If the German courts vote down the ESM that could seriously alter how the ECB plans to proceed.
Compounding the issue is Spain and Italy. Both are rumored to be on the verge of asking for a bailout from the ECB/IMF/Eurozone. You may recall that over the last two years both Spain and Italy have consistently been labeled as too big to bailout. Yet Spain has already been granted a 100 billion euro rescue package for its failing banking system. That has failed to stop the capital outflow from Spain. The country is mired in a deep recession. One in four people are out of work. If you're under 25 years old in Spain the unemployment rate is 53%. A Reuters article just reported on the surge of money leaving the country has spiked by +40% in June to 56.6 billion euros ($71 billion). Compare that to May's 41.3 billion in outflows. Investors are yanking their money out as fast as they can. Over the last twelve months (ending in June) Spain has seen 315.6 billion euros leave the country (that equals about a third of their GDP). This is a huge vote of no confidence. It's rumored that the ECB President Draghi and Germany's Merkel have quietly asked Spain to wait until after September 12th before asking for any additional help.
Aside from the big events coming up in the next two weeks nothing else has changed. Greece is still on the verge of collapse and many think the country will eventually leave the Eurozone in spite of all the bailouts. The troika is supposedly auditing Greece's performance on the prior bailout agreements and assessing the country's health sometime in September. China's economy continues to slowdown and could become another market-moving influence later in the year and especially into 2013. Although there is a chance that the new Chinese leadership will launch some form of additional stimulus before the end of 2012. The situation with Iran and Israel remains tense and Syria is in the midst of a civil war. Let's not forget the U.S. has a presidential election in about ten weeks. There are plenty of catalysts to move the market between now and the end of the year.
Currently the market's general trend seems to be higher but until the major averages get past their 2012 highs investors are going to worry about a failed rally at resistance and a reversal lower.