Hurricane Sandy is in the history books. Now we move from one storm to another with a tightly contested U.S. presidential election about to make landfall.
Fifty million people living on the east coast of the U.S. were impacted by Hurricane Sandy. That is approximately 1 out of 6 Americans as the massive storm hit some of the most heavily populated areas of the country. Almost a week later some are still without power and gas shortages have been plaguing the major metropolitan storm-hit areas. The latest estimates put Sandy's damage at $50 billion and only half of that will be covered by insurance companies.
In the wake of Hurricane Sandy it was not surprising to see a bumpy week for stocks even though the week was only three trading days long. Sandy was responsible for the U.S. market's first two-day weather closure since 1888.
In spite of the market volatility stocks actually ended the week relatively flat.
U.S. economic data was generally positive last week. The latest data on home values showed prices rose toward two-year highs. The ISM report showed manufacturing activity ticked higher to 51.7, which was above estimates for 51.0. Readings above 50.0 indicate growth and expansion. Initial jobless claims ticked lower to 363,000, which was less than expected. Of course the big surprise was the nonfarm payroll report.
Economists had been expecting the nonfarm payroll (jobs) report to show growth of +120,000 jobs in October. The Bureau of Labor Statistics said the U.S. added +171,000 jobs. Furthermore they upgraded September's number from +114K to +148K and raised the August jobs report from +142K to +192K. Overall it was a positive jobs report that sent stocks higher. Unfortunately for stock market bulls the rally didn't last very long.
The latest economic data from Europe is less encouraging. The Eurozone's PMI report on manufacturing activity came in at 45.4. This was the 15th month below the 50.0 mark. Germany saw its unemployment rate rise higher than expected. Elsewhere confidence numbers are falling with the Eurozone economic confidence survey declining to levels not seen since 2009 and the U.K. consumer confidence survey dropping to a six-month low. According to many experts the economic slowdown plaguing Europe remains the biggest obstacle to global growth.
This weekend there was some positive news from China. The official Chinese PMI index rose to 50.2 in October, up from 49.8 in September. This was the first time in three months that the Chinese PMI has come in positive (above 50.0). If this is true then it's definitely a positive signal for the global economy. Unfortunately, many consider the Chinese government's "official" statistics to be misleading and likely manipulated. It is worth noting that this rise in manufacturing output is not supported by China's declining electricity consumption. If factories were humming with increased activity that would be evident in the country's power consumption.
The S&P 500 index is only up +0.2% for the week or should I say the three days the market was open last week. Thursday's breakout higher past short-term resistance at 1420 didn't last very long and traders sold the news on Friday morning.
15-minute chart of the S&P 500 index:
The S&P 500 index looks a bit more ominous on the daily chart. You can see how the bounce failed at technical resistance at the 50-dma (pink line). Technically the failed rally on Friday morning is also a 50% retracement of the drop from October 18th through the end of the month. I suspect that odds are very high that we will see the S&P 500 index retest support near 1400-1395 soon. Whether that is Monday or Tuesday or later in the week I can't say. We could see stocks churn sideways for a couple of days while the market waits to see who wins the U.S. presidential election.
Bigger picture, until we see the S&P 500 close over 1470 then there was always be a concern that the rally will fail at resistance in the 1460-1470 area. If support near 1400 breaks then the S&P 500 will likely drop toward its 200-dma near 1380.
chart of the S&P 500 index:
It was another down week for the NASDAQ Composite. Friday's session saw a bearish reversal at resistance and it created a bearish engulfing candlestick pattern. I strongly suspect we will see the NASDAQ break through support near 2950 and its 200-ema and that could set up a drop toward 2850.
chart of the NASDAQ Composite index:
It is probably no coincidence that the NASDAQ is down five out of the last six weeks and shares of Apple Inc. (AAPL) are down six weeks in a row. AAPL was getting a lot of attention on Friday with the stock's relative weakness (-3.3% decline) and AAPL's breakdown under technical support at its 200-dma and 200-ema.
Currently AAPL is off -18% from its September highs. It's quickly approaching bear market territory (-20%). There is speculation that AAPL is nearing a capitulation sort of sell-off where shares see a huge surge lower on massive volume. Trying to catch a bottom in AAPL's decline is probably a good example of trying to catch the "falling knife" traders talk about. If you're not careful you'll likely get hurt. If you are watching AAPL then I would keep an eye on the July low near $530-528. That's where I would expect at least a short-term bounce.
Weekly chart of the Apple Inc. (AAPL):
Turning back to the NASDAQ for a second, if you look at a longer-term weekly chart, the NASDAQ has a bear-wedge sort of feel to it. A breakdown under the current trend line could definitely suggest a bigger correction ahead. Unfortunately the path of least resistance is definitely down.
Weekly chart of the NASDAQ Composite index:
The small cap Russell 2000 index continues to mirror the NASDAQ. The two-day bounce last week was reversed with Friday's decline. The $RUT remains in a six-week bearish channel. Plus Friday's session has created a bearish engulfing candlestick, which is a one-day bearish reversal pattern.
It is worth noting that the $RUT has not yet broken the trend line of higher lows (dotted line on the chart), at least not convincingly yet. It definitely looks poised to break this trend soon. The key area to watch is probably the 800 mark. A close under 800 would break all the major moving averages except the 300-dma. If the $RUT does breakdown under 800 then it's probably headed to 780 or the previous lows near 765.
Daily chart of the Russell 2000 index
This week's events and economic reports will be completely overshadowed by the U.S. presidential election on Tuesday, Nov. 6th. Assuming the market does not just churn sideways ahead of the election then the reports to watch are the ISM on Monday, and the ECB rate decision and Chinese inflation data on Thursday.
We've only got three weeks left until the Thanksgiving holiday (yum!) and only 50 days left until Christmas. You'd better start shopping now and do your part to help the economy.
Economic and Event Calendar
- Monday, November 5 -
ISM Services for October
- Tuesday, November 3 -
U.S. Presidential Election
- Wednesday, November 7 -
Eurozone retail sales
- Thursday, November 8 -
Weekly Initial Jobless Claims
ECB interest rate decision
ECB President Draghi's press conference
Chinese inflation data
- Friday, November 9 -
University of Michigan consumer sentiment survey
Wholesale Inventory data
Additional Events to be aware of:
Nov. 22nd - U.S. markets closed for Thanksgiving holiday
Dec. 12th - FOMC meeting
The Week Ahead:
Looking ahead I would not be surprised to see this week look a lot like last week. Lots of sideways churning, brief moments of volatility, and yet very little movement. If I had a crystal ball I would expect to see stocks drift sideways on Monday and Tuesday, chop wildly on Wednesday as the market reacts to the U.S. election results or lack thereof, and then more sideways churning.
Yes, it is very possible that the U.S. presidential election will not be decided by Tuesday night. There was a recent story (click
here if you're interested) about how a new program in Ohio related to absentee ballots could push the results of the entire election off by several days. Essentially, if you live in Ohio and asked for an absentee ballot and then didn't turn it in they will give you a provisional ballot on Nov. 6th and hold it. This way they can double check and make sure you didn't vote twice, once with your absentee ballot and once at the polls.
President Obama and challenger Mitt Romney need 270 electoral votes to win the election and battleground state Ohio's 18 electoral votes could be crucial in determining the winner. The same 18 votes might also be several days late in being cast.
Turning back to the stock market for a moment, the action this past week was bearish in my book. The bounce from support was sold at resistance. Now we have a new lower high for nearly all the major indices. While the path of least resistance definitely seems to be lower the bulls could garner some support from the calendar.
You've probably heard of the strategy to "Sell in May and go away". This refers to the strategy of exiting the stock market in the month of May to avoid the worst six months of the year. The other side of that coin is putting your money back into stocks in November, which begins the best six months of the year. These are long-term seasonal trends that have been tracked for decades and continue to hold up for now. The difference in returns between owning stocks all twelve months and only holding them from November through April is pretty significant. This does not mean that stocks can't go down or that they will immediately rally just because we've hit November but it does provide a bit of a psychological boost for the bulls.
I warned you a week ago to watch the U.S. dollar. On Friday the dollar soared and it sparked a sharp sell-off in commodities. Both gold and oil plunged. Falling oil prices should be bullish for the economy. Let's hope the trend continues and that we do not see a flare up in hostilities in the Middle East after the U.S. election is over that could reverse this trend in oil.