Last week saw the U.S. government begin its 19th shutdown since 1976. Fortunately in spite of the naysayers the world didn't end and the stock market didn't crash. Overall it seems that stock market participants are very complacent over the shutdown. The prevailing attitude still seems to be use any weakness on the shutdown or debt ceiling fight as a new buy-the-dip entry point. Of course we did see some increased volatility as traders reacted to political rhetoric out of Washington D.C. For the week ending October 4th the S&P 500 index only lost -0.07%. The NASDAQ gained +0.69% and the small cap Russell 2000 index rose +0.38%. Both the NASDAQ and the Russell are up five weeks in a row. There is definitely no fear of the government shutdown - at least not yet.

Economic Data

The U.S. economic data is sending mixed signals again. The Dallas regional fed survey came in better than expected at 12.8 when economists were looking for a reading closer to 6. The Chicago PMI report's September reading rose from 53.0 to 55.7, which is the best number since February. U.S. vehicle sales in September slowed a bit with the annual pace coming in at 15.21 million. That was lower than expected and the slowest pace since April.

The national ISM manufacturing index improved from 55.7 to 56.2, which is the highest level since April 2011. Yet the national ISM non-manufacturing (a.k.a. services) index plunged from 58.6 to 54.4. The August reading was a multi-year high so many analysts were expecting a pullback in September. Yet the size of the pullback was surprising. The -4.2 point drop in the services index was the biggest one-month drop in almost five years. Fortunately, for these ISM reports number above 50.0 indicate economic growth.

The ADP Employment Change report came out last Wednesday with +166,000 new private sector jobs in September. That was below estimates of +180K. The August reading was revised lower from +179,000 to +159,000. Meanwhile, due to the government shutdown, the Bureau of Labor Statistics did not issue their monthly non-farm payrolls (jobs) report. Their website says their department "will not collect data, issue reports or respond to public inquiries". Thus for the first time in 17 years the jobs report has been postponed. Yet the "no jobs report" headline is bogus. The BLS compiles the report the Monday prior to its normal Friday release. Last Monday was September 30th, before the government shutdown. The decision to not release it is pure political theater by the White House.

Overseas Data

The trend of mixed economic data continued overseas as well. Last week the Eurozone said retail sales rose +0.7% month over month. The EU consumer is still holding in there. Yet Eurozone manufacturing PMI data slipped from 57.1 to 56.7. Analysts had been expecting an improvement. German manufacturing PMI also slipped with a drop from 51.3 to 51.1. Remember, numbers above 50.0 display growth and the German one is close to flat. Germany also said there was a surge of +25,000 new unemployed last month and their unemployment rate rose from 6.8% to 6.9%. Elsewhere in Europe there was plenty of press regarding the political turmoil in Italy but it doesn't seem to be having much impact on the stock markets.

Across the Pacific Ocean there was more mixed data out of Asia. China's HSBC manufacturing PMI data fell from 51.2 to 50.2, which is awfully close to negative territory (below 50.0). The official Chinese government manufacturing PMI actually rose from 51.0 to 51.1. China's official non-manufacturing PMI also rose with a gain from 53.9 to 55.4. Meanwhile Japan said their industrial production fell -0.7% month over month, which is down from the prior month's +3.4% reading. Japanese manufacturing PMI data inched higher from 52.2 to 52.5, which is the highest reading since February 2011. The unemployment rate in Japan rose from 3.8% to 4.1%, which was worse than expected. The Japanese government also announced plans to raise their sales tax from 5.0% to 8.0%, which sparked a -2.2% sell-off in the Japanese NIKKEI stock index.

Major Indices:

Last week the S&P 500 index flirted with support near 1680 and its simple 50-dma. There were some intraday declines below this level. Thursday, October 3rd actually closed below this support level but stocks rebounded on Friday. This large cap index is only down -2.0% from its mid September high of 1725. Believe it or not but the S&P 500 is actually up nine points since the government shutdown began.

After a three-week rally the S&P 500 is now down two weeks in a row. If the pullback continues the index should also find additional support near 1660, which is bolstered by its 100-dma and a trend line of higher lows dating back to November 2012. On the other hand if the S&P 500 can rally there is likely resistance at 1700 and 1725.

chart of the S&P 500 index:

The NASDAQ composite actually posted a gain last week and stretched its rally to five weeks in a row. It's not very convincing but the NASDAQ has technically produced a bullish breakout above round-number resistance at the 3800 level. The NASDAQ also tested support near its rising 20-dma twice last week.

On a short-term basis the trend here is positive and the NASDAQ looks poised to hit new multi-year highs. The next likely resistance levels are 3850 and then 3900. Pretty soon the 4,000 level could start to act like a magnet. The index should find support near 3750 and 3700 with 3700 being underpinned by the rising 50-dma.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index added +0.38% last week and extending its gains to five weeks in a row. The index did spend a couple of days above resistance at the 1080 level but pulled back by Friday's close. The bears could argue that momentum indicators are falling for the $RUT which suggest the rally is tired. After a five-week run it could be time for a pullback. Yet so far the $RUT has been able to hold support near the 1060 level. If the $RUT were to see a correction it should find additional support near 1040 and then the bottom of its multi-month bullish channel is near the rising 100-dma. If the up trend continues then the 1100 level is most likely round-number resistance.

chart of the Russell 2000 index



Economic Data & Event Calendar

It's going to be a relatively quiet week for economic reports. Not only that but we don't know which U.S. government reports will be released and which ones might be delayed due to the government shutdown. The biggest event on the calendar will be the FOMC minutes from the last meeting. Since everyone was expecting the Fed to announce some sort of QE taper at the last meeting there were definitely be some interest in these minutes.

Economic and Event Calendar

- Monday, October 07 -
consumer credit data
German trade data

- Tuesday, October 08 -
U.S. trade balance data

- Wednesday, October 09 -
wholesale inventories
FOMC minutes
Eurozone industrial production

- Thursday, October 10 -
Weekly Initial Jobless Claims
U.S. import/export prices

- Friday, October 11 -
U.S. retail sales for September
Producer Price Index (PPI)
University of Michigan consumer sentiment

Additional Events to be aware of:

Oct. 29-30th: next (two-day) FOMC meeting

The Week Ahead:

As we look at the week ahead the stock market is going to be focused on two things. First will be the government shutdown. Second will be corporate earnings with the Q3 earnings season about to start. Alcoa (AA) typically kicks off earnings season and they report on October 8th. Yet the pace of earnings reports doesn't really pick up speed until the following week. That means the market's focus will be fixated on the shutdown due to the budget battle and the debt ceiling.

It is worth noting that everyone keeps using the word "shutdown" for what's going on with the U.S. government. Yet according to estimates we've only "shutdown" between 13% to maybe 18% of the federal government. Let's round it off to about 15% of the U.S. government is shuttered. That is expected to have an impact on U.S. GDP and each week the government is "shutdown" could shave off -0.01% from our GDP growth (some estimates put that number a bit higher). This also means that the Federal Reserve is not going to taper any time soon. They saw the threat of the government shutdown coming and chose to postpone any taper. If the past is our guide then no taper is usually bullish for stocks. That pushes the next possible QE taper worry into December and possibly January.

The bad news regarding the shutdown is the impact it could have on the U.S. consumer. All the acrimony in Washington is eroding any confidence in our economy. A recent Gallup poll showed that American confidence in the economy plunged to -32. If this trend continues it could influence consumer spending. Fortunately, at the moment, consumers are getting a tiny boost from falling gasoline prices. AAA said the average price for gas has fallen thirty days in a row. We need to keep in mind that there are less than 80 days until Christmas and the November and December time frame is crucial for retailers. Traditional thought would suggest that low-confidence (nervous) consumers don't spend much money.

Currently both sides of Washington continue to dig in their heels over the U.S. budget. More and more the fight seems to be merging both the budget battle and the U.S. debt ceiling issue. Instead of two fights it could turn into one big huge melee. Right now the U.S. treasury says they can keep paying bills until October 17th. Odds are the government shutdown will last until the 17th and I wouldn't be surprised if we crossed that deadline. With the U.S. government operating at 85% that could mean the Treasury will have a little bit more wiggle room as far as money in the bank. That might mean the drop dead date is the 18th or 19th.

I am trying to use traditional ideas of paying bills but it's not like the U.S. government is going to run out of dollars, not when they can print more. Plus, the U.S. government receives about $250 billion a month in tax receipts and the debt service on our current debt is about $35-40 billion a month. There is no real threat of a debt default but we could see the U.S. credit rating get downgraded again.

Big picture nothing has changed much from last weekend. We can expect the political wrangling to last another couple of weeks. The stock market will be susceptible to short-term spikes (up or down) based on the latest sound bite out of Washington. There has been some suggestion that it will take a sharp, painful sell-off in the stock market to finally shock the democrats and republicans into finally compromising on a deal. In the mean time I would focus on the small cap Russell 2000 and the NASDAQ composite since both have more components than the Dow Industrials or the S&P 500 and both the $RUT and the NASDAQ are showing more strength.

James