The Syria question continued to loom over the markets all week but stocks managed a bounce anyway. Economic data continues to come in mixed although the biggest report for the week, the nonfarm payrolls, was a disappointment. The U.S. ten-year bond yield tagged 3.0% after hours on Thursday night. The last time yields were as high as 3.0% was July 27th, 2011. The G-20 leadership summit in Russia was a major story with Russian President Putin reminding the U.S. that they will assist their ally Syria if Syria is targeted by an "external attack" (i.e. the U.S.). Putin's comments sparked an afternoon sell-off on Friday. Yet by Friday's closing bell the S&P 500 ended the week with a +1.3% gain. Transports had a good week with a +1.9% gain. The semiconductor sector and oil service stocks were standouts with a +3.8% and +4.1% gains, respectively. Crude oil continued to march higher with a +2.3% gain.

Economic Data

There were a number of U.S. economic reports for the first week of September. The ISM (manufacturing) index improved from 55.4 in July to 55.7 in August. The gain was driven by the new orders component, which jumped from 58.3 to 63.2. The non-manufacturing ISM index increased from 56.0 to 58.6 in August. The Federal Reserve's Beige Book report seems to be stuck on repeat with the Fed saying the U.S. "continued to expand at a modest to moderate pace."

The market's focus was on jobs data. The ADP employment change report came in with +176,000 new private sector jobs in August. This was down from July's +198,000. The weekly initial jobless claims continue to sink with the latest reading down -9,000 to 323,000. The less volatile four-week moving average has sunk to another six-year low at 328,500. The big report was the nonfarm payrolls (a.k.a. jobs report) on Friday morning. Analysts were expecting +180,000 and there were some whisper numbers for +200K. Unfortunately the U.S. government said job growth came in at +169,000 in August. That was up from July's initial reading of +162,000. The bad news is that July's reading was revised down from +162K to +104K. June's reading was revised down from +195,000 to +172,000.

Another surprise on Friday was the unemployment rate, which ticked down from 7.4% to 7.3%. Sadly the improvement was not because more Americans found jobs. Instead the drop in unemployment was because fewer Americans are looking for work and the labor force participation rate dropped to 63.2%. That's the lowest reading since August 1978 (35 years).

chart of Labor Force Participation:

Overseas Data

Economic data overseas was generally benign. The Bank of Japan left rates unchanged at +0.1% and raised their economic forecast. The European Central Bank left rates unchanged at +0.5%. The latest estimate on the EU's Q2 GDP was unchanged at +0.3%. The Eurozone saw its manufacturing PMI rise slightly from 51.3 to 51.4. Numbers above 50.0 indicate growth. China said its manufacturing PMI rose from 50.3 to 51.0. The Chinese HSBC manufacturing PMI data was unchanged at 50.1.

There was a few hiccups. India's HSBC manufacturing PMI dropped from 50.1 to 48.5. France said their unemployment rate hit a new 13-year high with a rise from 10.8% to 10.9%. Meanwhile Portugal is inching closer to the cliff with yields on Portugal's 10-year bonds surpassing 7.0%. Normally a 7.0% yield is a major warning signal. Yields can't stay this high very long or the country will be able to finance its debt. This could be a sign that Portugal will need another bailout.

Syria

One of the biggest stories of the week was Syria and whether or not the U.S. would attack Assad's regime over allegations the Syrian government used chemical weapons. Last weekend President Obama said he would ask congress to debate and vote on a resolution to attack Syria. In the last few days there has been growing opposition for Obama's plan to attack. Right now the president does not have enough votes to get approval. It's important to note that Obama has never said he needed Congress' approval but he felt it would send a stronger statement if he had congressional approval. Unfortunately for the president, Americans seem to be strongly opposed to any military strike in Syria and they're calling their representatives and letting them know.

Americans are not the only ones against a military strike. President Obama was hoping to build support at the G-20 summit. He came home without any new significant allies. Russian President Putin roiled the markets a bit on Friday with his comments that Russia would help its ally Syria if Syria suffered an external attack. Over the last couple of weeks Russia has sent several ships into the Mediterranean to be available if the conflict in Syria spreads.

Major Indices:

The S&P 500 index bounced off its trend line of support that's just below the rising 100-dma (see chart). Yet the bounce stalled on Friday at its 50-dma. For the week the S&P 500 index added +1.3%. It's currently sitting less than 55 points from its all-time high in early August (about -3.1%). If this bounce continues then the S&P 500 should find resistance near 1680. If this bounce fails and the index breaks down below the trend line then the 1600 level is likely support. If 1600 fails then we could witness a drop to the simple 200-dma.

chart of the S&P 500 index:

The NASDAQ composite was the best performer among the major indices with a +1.9% gain last week. The tech-heavy index got a boost from a strong performance in the semiconductors (+3.8%). The NASDAQ is now less than 35 points (less than 1%) from a new 13-year high. A breakout past the 3700 level could inspire new confidence for investors. On the other hand, if the NASDAQ reverses, a breakdown under the 50-dma will probably signal a drop toward the 3500 level and its 100-dma.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index has been trying to bounce but the simple 50-dma has been acting as overhead resistance. Friday's rally attempt failed near the four-week trend line of lower highs (see chart). The long-term trend is still up but the intermediate trend is down. A close above 1040 could re-ignite the rally in the small caps. Meanwhile if stocks reverse lower the $RUT will likely find some support near the 1,000 mark and its 100-dma.

chart of the Russell 2000 index



Economic Data & Event Calendar

The economic calendar slows down a bit this week. The only real events of any significant are not reports but the U.S. congress returning to Washington and President Obama's televised speech to the nation on Tuesday night. He will be trying to drum up support for a military strike on Syria.

Two weeks from now will be the FOMC meeting.

Economic and Event Calendar

- Monday, September 09 -
Congress returns to Washington.

- Tuesday, September 10 -
President Obama to speak on Syria
China's industrial production data

- Wednesday, September 11 -
MBA mortgage index data

- Thursday, September 12 -
Weekly Initial Jobless Claims
Eurozone industrial production data
import/export prices

- Friday, September 13 -
Retail sales for August
Producer Price Index (PPI)
University of Michigan consumer sentiment
business inventories for July

Additional Events to be aware of:

Sept. 18th - FOMC meeting & Bernanke press conference
Sept. 22nd - German elections
September - U.S. debt ceiling deadline

The Week Ahead:

Looking at the week ahead I would not be surprised to see stocks trading sideways. Sentiment wise the market acts like it wants to move higher. It feels like investors have convinced themselves that the QE taper might be a good thing because that would mean the Fed believes in stronger U.S. growth. Then again that could be wishful thinking. Part of the problem was Friday's jobs report. A strong number would have helped assure Wall Street that the Fed would taper in September. Yet the data was weak and the revisions made Friday's data even weaker. Weak economic data would suggest the Fed will postpone the taper since they've said multiple times the decision was data dependent. Odds are still good that the Fed will try and find an excuse to begin tapering their QE program before Ben Bernanke leaves his position in January.

Whether or not the Federal Reserve does or does not announce a taper to their QE program on September 18th will be the main story for the next several days. Competing for headline space will be the Syria issue and whether or not the U.S. will or will not strike. It's quite possible that if the Fed does announce a reduction in QE on the 18th that stocks see a knee jerk reaction lower and then recover. The same thing could happen if the U.S. does strike Syria, a short-term move lower that is quickly bought. Although the Syria issue is more complicated because market reaction will be influenced by what happens afterward.

If the U.S. does strike Syria, how will Russia respond? Will Assad make good on his threats to strike at Israel? Will Iran make good on their threats to retaliate? There has been some speculation that Iran could try and shut down the Strait of Hormuz in response to a U.S. strike on Syria. A more interesting question to ask is what happens to U.S. politics at home and on the international stage if President Obama strikes Syria without congressional approval. Currently the U.N. security council has said no. NATO has said no. Yet the whole world is watching to see if the U.S. is going to follow up on its threats to punish those who use chemical weapons. It's almost a lose-lose situation for President Obama. If he does strike Syria without any allies and hard evidence then the U.S. is going to look like a bully. If we don't strike then the U.S. will look weak, which will only foster more violence and more chemical weapon usage.

Additional landmines that could influence market behavior are the upcoming U.S. budget and U.S. debt ceiling debates and deadlines. That could be two or three weeks away. Overall the combination of the taper, Syria, and the debt ceiling present a number of hurdles for the market. The next few weeks could be a roller coaster for the market.

James