The S&P 500 index has snapped a seven-week winning streak. The large cap index only lost four points thanks to a big rebound on Friday. The sell-off started on Wednesday following the FOMC minutes. The market was overbought and traders were looking for an excuse to sell. The FOMC minutes hinted that the Fed might end its QE program sooner than expected and that was blamed as the catalyst to sell stocks. On Friday, St. Louis Fed President James Bullard, a voting member of the FOMC, squashed any rumors that the Fed would end QE early when he stated, "The Fed's very aggressive easy money policy is going to stay that way for a long time." His comments helped fuel the sharp rebound in stocks on Friday. By the end of the week the U.S. dollar was up sharply and that fueled sharp losses in precious metals for the week.
We had a lot of economic data both here and abroad. In the U.S. there were a number of reports on the housing industry. Building permits came in at 925,000, which was better than expected. Housing starts were a disappointing at an 890,000 annual pace. The January existing home sales numbers only hit a annual pace of 4.92 million, which was below estimates. Another disappointment was the NAHB housing market (confidence) index, which showed a drop from 47 in January to 46 in February. This was the first decline in 11 months. If that wasn't bad enough homebuilder Toll Brothers (TOL) reported earnings that missed both the top and bottom line estimates. This depressed most of the homebuilder stocks.
Elsewhere in the U.S. the wholesale inflation data in the Producer Price Index (PPI) increased +0.2% in January. The consumer-level inflation data in the CPI was flat at +0.0% but the core-CPI rose +0.3%, which was hotter than expected. Weekly jobless claims rose +20,000 to 362,000. The February reading for the Philadelphia Fed manufacturing survey was a big disappointment. Economists were expecting the Philly Fed to bounce from -5.8 into positive territory but it declined to -12.5.
There were plenty of headlines overseas. Germany is the biggest and strongest economic member of the Eurozone. This last week the latest GDP Q4 growth estimates was released but Germany's Q4 GDP was left unchanged at a negative -0.6%. Germany's manufacturing PMI data came in at 50.1, which was below estimates of 50.5 and awfully close to falling negative under the 50.0 level. Numbers under 50.0 indicate contraction. Yet in spite of the negative data Germany's IFO business climate index rallied three points to 107.4. That is a 10-month high and the best one-month gain since July 2010.
France is another large Eurozone member and its GDP is expected to be revised lower by half a point. The French manufacturing PMI shrank to 43.6. The combination of both France and Germany struggling weighed on the Eurozone as a whole. Eurozone manufacturing PMI slipped to 47.8, which was below expectations. The European Commission has downgraded their growth forecasts and believe that the eurozone GDP will fall -0.3% in 2013. That will be the second eurozone-wide recession since 2009. They are currently forecasting very weak growth of +1.4% for all of 2014.
Another big headline out of Europe was Moody's Investor Service downgrading the U.K.'s credit rating from AAA to AA1 on Friday. Analysts are concerned that rising debt and subpar growth prospects will hamper the economy in the U.K. Greece is also starting to make headlines again. There was another massive worker strike. Greece will likely make headlines again next week when the struggling country meets with the "troika". Across the globe China was having an impact on materials and industrial metals. The communist country is trying to slow down rising home prices. If China is successful it would likely slow down construction of new homes and thus weaken demand for materials.
In other news the world's biggest retailer, Wal-Mart (WMT), reported earnings on Feb. 21st. They reported their Q4 results, which beat Wall Street estimates by 10 cents with a profit of $1.67 a share. Revenues were up almost +4% to $127.9 billion for the quarter. The massive company said its Q4 same-store sales were up +1.0%. You may recall WMT recently made headlines when Bloomberg reported on an internal Wal-Mart email with company executives bemoaning that February's month-to-date sales were a "disaster". The combination of the increase payroll tax and rising gasoline prices were taking a toll on WMT's customers. The most recent data shows that gasoline prices in the U.S. are now up 36 days in a row and averaging $3.78 a gallon across the nation. Prices are above $4.00 a gallon along much of the east and west coast. This doesn't bode well for Wal-Mart or the retail sector in general. WMT management said they expect Q1 same-store sales to be flat (+0.0%).
The S&P 500 index rallied to a new multi-year high on Tuesday. It looked like the index had finally escaped the gravitational pull of the 1520 level. Yet the Wednesday-Thursday sell-off erased about nine days worth of gains. Traders bought the dip near the 1500 level and its rising 30-dma thanks to Fed President Bullard's comments. A lot of short-term support remains broken even with the big bounce on Friday. Optimistic traders might be tempted to buy Friday's bounce. I am more cautious here. The 1520 level and the 1530 level both overhead resistance. The S&P 500 remains overbought. I have adjusted the Fibonacci retracement tool on the daily chart below. A dip to 1480 or 1460 could be a healthy-sized correction.
The weekly chart still shows resistance near a long-term trend line and there is still a risk that the S&P 500 could form a bearish triple top (displayed on the long-term monthly chart).
chart of the S&P 500 index:
Weekly chart of the S&P 500 index:
Monthly chart of the S&P 500 index:
The NASDAQ briefly broke through resistance near the 3200 level. Unfortunately the sharp two-day sell-off erased all of February's gains. I have adjusted the Fib retracement tool on the daily chart below and you can see how the NASDAQ composite almost hit the 38.2% retracement level.
The 3200 level remains overhead resistance as does short-term technicals like the 10-dma and 20-dma.
Weekly chart of the NASDAQ Composite index:
The small cap Russell 2000 index tagged a new high on Tuesday. Then the two-day sell-off erased all of February's gains with a plunge to round-number support at the 900 level. The index did bounce and outperform its large-cap rivals on Friday but some of its up trend support remains broken. The 930 level is still resistance. A pullback toward the 880-870 region would be a much healthier correction.
chart of the Russell 2000 index
Economic Data & Event Calendar
We have a relatively busy week for economic data and events. The Chicago PMI and national ISM data will be an important look at Q1 activity. We'll see the second estimate on Q4 GDP growth in the U.S. That could get revised higher. Federal Reserve Chairman Ben Bernanke will be speaking before the U.S. Senate on Tuesday and the House on Wednesday. If he says anything new it could be a market mover.
This Sunday, Feb. 24th will be the China HSBC PMI (manufacturing) data. The official Chinese PMI comes out on Feb. 28th. A potentially bigger event could be the Italian elections on Sunday (24th). If any of the anti-euro candidates get elected in Italy it could cause a lot of trouble for the region's recovery efforts and the markets would most likely start to sell-off on Monday.
Economic and Event Calendar
- Monday, February 25 -
- Tuesday, February 26 -
Case-Shiller 20-city home price index
New Homes Sales data for January
Fed Chairman Bernanke addresses the Senate
- Wednesday, February 27 -
Durable Goods Orders for January
Pending Home Sales for January
Fed Chairman Bernanke addresses the House
- Thursday, February 28 -
Weekly Initial Jobless Claims
U.S. Q4 GDP (second estimate)
Chicago PMI data
- Friday, March 01 -
U.S. sequestration deadline
Personal Income & Spending data
ISM index for February
vehicle sales for February
Eurozone PMI data
Eurozone unemployment data
Additional Events to be aware of:
Mar. 8th - non-farm payrolls (jobs) report
Mar. 20th - FOMC meeting & Bernanke press conference
The Week Ahead:
Drowning out most of the headlines will be the upcoming U.S. sequestration deadline on March 1st. As if we haven't heard enough about this event so far the financial media will focus on sequestration 24/7. The funny thing is, as much as President Obama whines about sequestration and how bad it will be for the country, it was his idea to begin with back in 2011. The White House acts like a $90 billion spending cut for 2013 will kill the country but he just got a $160 billion tax increase (some would say $264 billion) and no one even batted an eye when congresses passed a $50 billion aid package to help rebuild from superstorm Sandy.
The markets do not seem that concerned about the sequestration with the major indices trading near multi-year or all-time highs. The next hurdle will be the battle over a budget at the end of March and after that it will be the debt ceiling debate, which returns in the middle of May. We just saw Moody's downgrade the U.K. If U.S. politicians don't do something serious about the budget, debt ceiling, and spending we could see the U.S. get downgraded again.
Currently the markets are in a state of flux. The upward momentum has been challenged. It's possible traders buy the dip and the up trend resumes. It's also possible that this bounce fails and we see a normal, healthy correction of -5% to -10%. That would mean a drop to 1450 (-5%) to 1375 (-10%) on the S&P 500 index. I would actually be surprised if we saw a drop below 1450 unless economic data really turned sour.
Sometimes the best trade is no trade. Why buy now when we might see a better entry point two or three weeks down the road.