Seasonally August is one of the worst months of the year for stocks. Thus far the first full week of August is following historical trends with all the major U.S. indices posting losses. That's a bit disappointing when just one week ago the S&P 500 had closed at historic highs with a breakout past the 1700 mark. Overall it was a relatively quiet news week. The J. C. Penney Company (JCP) was a popular topic with a very public spat between major shareholders and management. Amazon.com founder and CEO Jeff Bezos made headlines after personally buying the Washington Post newspaper for $250 million. I was hoping for a slowdown in the taper talk regarding the Federal Reserve's QE program. Yet Dallas Fed President Richard Fisher rekindled taper fears on Monday with his comments that the Fed might taper later this year if the economy continues to improve. Taper fears continued to plague the market the rest of the week.
U.S. economic news was relatively quiet and the headlines we did see were positive. Two weeks ago the ISM manufacturing number came in way above expectations. This past week the ISM services index surged from 52.2 to 56.0, marking its best reading in five months. The rise was fueled by a big improvement in the new orders component. U.S. trade deficit numbers for June delivered the small trade deficit in almost four years at $34.2 billion. That's down from May's $44.1 billion. Meanwhile weekly initial jobless claims continue to improve and the four-week average slipped to the lowest level since November 2007.
Economic data out of Europe was mixed. The Eurozone services PMI ticked higher from 49.6 to 49.8, which happens to be an 18-month high. Yet it remains below the 50.0 mark so it's still showing contraction. Eurozone retail sales were disappointing with a -0.5% decline versus a +1.1% reading the prior month. Germany's industrial production came in way above expectations at +2.4% and well above the prior month's -0.8% reading. Yet Spain and France saw declines with Spain's industrial production falling from -1.5% to -1.9%. France's industrial production came in at -1.4%. France is also suffering from a very sharp decline in hotel and restaurant business. One industry expert has labeled the drop off in restaurant business as "catastrophic".
There was a parade of economic data out of China this past week. The official PMI services index rose from 53.9 to 54.1. The HSBC Chinese PMI services index was unchanged at 51.3. Readings above 50.0 indicate growth. Inflation data was relatively in-line with estimates with China's CPI rising +2.7% and its PPI falling -2.3%. Retail sales in China rose +13.2% year over year. Industrial production improved from 8.9% to +9.7%. The monthly trade surplus numbers were a surprise at $17.8 billion when analysts were expecting $27 billion. Chinese exports rose +5.1% but imports rose +10.9%.
Meanwhile in Japan the country made history with their national debt exceeding one quadrillion yen. That's more than 1,000 trillion yen. Japan's debt is now more than 200% of its GDP. Analysts are worried that eventually the country's debt burden will grow so large that investors will doubt Japan's ability to pay it back. It's probably worth noting that more than one market pundit already believes that Japan has passed the point of no return. If investors lose faith in Japan's creditworthiness then interest rates on their debt will soar and the country will have to default or devalue their currency (again).
The large-cap S&P 500 index lost -1.0% for the week. After a three-day (Monday-Wednesday) decline it managed a bounce on Thursday but failed at the 1700 level. There is short-term support in the 1685-1680 zone. If that level fails I would look for support near 1650 and its 50-dma.
The closing high on August 2nd was 1709. A -3% correction would be 1657. A -5% pullback would be 1623.
chart of the S&P 500 index:
60-minute chart of the S&P 500 index:
The NASDAQ looks a bit healthier than the S&P 500. The NASDAQ composite only lost -0.8% last week and is still trading above short-term technical support at its rising 10-dma. On a short-term basis I would look for support at 3625, 3600, and 3575. If the 3575 level breaks then the NASDAQ is probably headed for the 3500 level near its 50-dma. Should the rally continue there is round-number resistance at 3700. Beyond that the next resistance level is probably 3750.
A -5% correction would produce a dip toward the 3500 level.
chart of the NASDAQ Composite index:
The small cap Russell 2000 index slipped -1.0% for the week. The index is still trading near the top of its channel. If the $RUT breaks down below support near 1040 then the next level to watch would be potential support at 1020 or the 1000 mark.
chart of the Russell 2000 index
Economic Data & Event Calendar
The Q2 earnings season is essentially over. The next FOMC meeting is mid-September. Congress is in recess. Millions of children are enjoying their last few days of summer before school starts in a couple of weeks. The event calendar is relatively quiet. We'll get the latest inflation data with the CPI and PPI numbers. The New York and Philadelphia regional Federal Reserve surveys will be released on Thursday.
Economic and Event Calendar
- Monday, August 12 -
- Tuesday, August 13 -
U.S. retail sales for July
business inventory data
- Wednesday, August 14 -
Producer Price Index (PPI)
MBA mortgage index
- Thursday, August 15 -
Weekly Initial Jobless Claims
Consumer Price Index (CPI)
New York Empire State manufacturing survey
U.S. industrial production
Philly Fed survey
- Friday, August 16 -
Housing starts & building permits
University of Michigan consumer sentiment survey
Additional Events to be aware of:
September 2nd, - U.S. market closed for Labor Day
September - U.S. debt ceiling deadline
September - German elections
The Week Ahead:
I was actually hoping that the QE taper talk would fade last week. Instead taper fears overshadowed the markets all week long. If we continue to see improving economic data in the U.S. then taper fears will likely continue even though the Fed has said they want to see several months worth of improvement before making any changes. In the mean time we're kind of in a slow spot for the stock market. Many market participants are away on vacation before the new school year starts up again in late August. That will likely keep trading volumes low.
Seasonally August and September are the worst two months of the year for stocks. The middle of August definitely has a pattern of weakness. Yet I am especially worried about September this year. When Congress comes back from their August recess they will immediately engage in a battle over the U.S. debt ceiling. The last big battle was August 2011 and the S&P 500 lost more than 15% while politicians played chicken with the U.S. credit rating.
September will also bring major elections in Germany. The latter half of September could be volatile as the market reacts to headlines.
Overall recent improvements in U.S. economic data are encouraging but we need to see a trend of improving data. Right now estimates for GDP growth in the second half are still too low. Wall Street needs to change their perspective and replace their dependence on the Fed's QE with a more bullish outlook on U.S. growth. Until that happens then continued talk of tapering QE will make the markets squeamish.
Currently the stock market's larger trend is higher but we are still overbought and likely due for a correction lower. As LEAPS traders we can look at the next correction as a new entry point for bullish positions but the key is being patient and waiting for that entry point.
"Those who don't study history are doomed to repeat it. Yet those who do study history are doomed to stand by helplessly while everyone else repeats it."