Last week the market was focused on two things: Black Friday retail sales and the OPEC meeting. Initial reports about Black Friday results were mixed. On Friday the tone of the conversation about holiday spending was bullish. As of tonight the latest estimates suggest consumer traffic and spending didn't quite meet estimates. Retail and consumer-related names traded higher on Friday in anticipation of a strong start to the holiday shopping season.
We'll know more come Monday as analysts decipher Black Friday details.
The other big story was crude oil and if the Organization of Petroleum Exporting Countries (OPEC) would announce a cut in production. We noted last week that Bloomberg's poll on the issue was split 50/50 that OPEC would announce a cut. They did not cut production and crude oil prices plunged on Friday but more on that in a moment.
The U.S. market has continued to climb during the Thanksgiving-holiday week. Yet momentum definitely slowed for a good portion of the market. The Dow Jones Industrial Average only gained +0.1% for the week. The big cap S&P 500 index eked out a +0.2% gain for the week. The small cap Russell 2000 was almost negative with a +0.07% gain. Meanwhile the NASDAQ composite soared +1.6% in the last three and a half sessions thanks to strong performances in semiconductors and biotechs. The SOX semiconductor index rallied +3.4% last week while the biotech index advanced +2.8%. Year to date the SOX is up +28% while the biotech index is up +47.5%.
Any stock related to oil or energy was hammered on the OPEC news. The OIX oil index lost -10% for the week and is down -11% for the year. The oil services index (OSX) crashed -13.4% and is now down -23% in 2014. This was thanks to a -13.4% plunge in crude oil, which closed the week at $64.47 a barrel. Crude oil is now down almost 33% for the year. Brent crude oil closed at $68.47 a barrel. Most of the transportation stocks rallied on oil's weakness. The Dow Jones Transportation Average gained +1.1% last week, which boosted its 2014 gains to +24%.
The U.S. dollar rallied on Friday and is now up five out of the last six weeks. The euro bounced for the week but was down on Friday. Meanwhile the Japanese yen continues to sink and ended at new multi-year lows. This dollar strength weighed on precious metals. Gold lost -2.8% to end the week at $1,151 an ounce. Silver slipped -5.8% and closed at $14.73 an ounce. The bond market has been in rally mode the last few days and the yield on the U.S. 10-year note is down to 2.16%.
OPEC's Oil Decision
The oil price cartel OPEC may be dying. Individual countries within the group are now at odds with one another. The shale-oil revolution inside the United States has hurt the group significantly. Booming U.S. oil production has slashed America's oil imports. Now there appears to be an oversupply situation in the oil market which has produced a major drop in crude oil prices this year.
OPEC countries are losing billions of dollars from the dramatic plunge in oil prices. OPEC met on Thursday in Vienna and instead of cutting production to boost prices they decided to leave production rates unchanged. This yanked the rug out from under already weak crude oil and oil plunged on Thursday and Friday, down almost -12% for the week.
Why would OPEC refuse to cut production when they knew it would send oil prices lower? It's all about the cost of oil. First you have to realize that half of OPEC's members do not abide by the production or quota rules set by the cartel anyway. They are notorious for pumping as much oil as they can to support their individual country's need for cash. Unfortunately for other OPEC members Saudi Arabia has the lowest cost per barrel, which is around $10. Other OPEC nations have a breakeven cost in the $30 to $40 range while a few are significantly higher. Venezuela's breakeven price is about $97.50 a barrel. Several analysts believe Iran, Saudi's political enemy, also needs oil near $100 a barrel. One Russian analyst said Iran actually needs $140 a barrel to balance its budget.
Russia, who is not a member of OPEC, is going to be stung by this OPEC decision as well. Russia needs oil near $100 a barrel. Reuters noted back in August that Russia's budget is based on Brent crude at $114. The combination of Western sanctions against the Russian economy and plunging crude oil prices is extremely painful for Russia. The main target by Saudi's decision, I mean OPEC's decision, to not cut production seems to be the U.S. shale industry.
The different shale formations in the U.S. have different expenses based on the drilling industry's ability to access the oil there. Some shale formations have a breakeven cost above $80. Other formations have a breakeven cost closer to $42. A large chunk of U.S. shale needs crude oil above $70-80 a barrel. Below that and producers would be losing money. The Saudi's know this and they clearly want to slow U.S. production.
The market reacted to the OPEC decision with huge declines across the energy sector and just about anything energy related. Even the railroads were hurt on Friday because they transport a huge amount of shale oil across the U.S. Plus lower oil and natural gas prices will decrease demand for coal (to burn for electricity) and less demand for coal will also hurt the railroads who do big business moving coal. The rest of the transportation industry rallied as lower oil prices mean lower fuel costs for truckers and airlines. The airline stocks are up +17% in November thanks to falling crude oil.
Another winner from OPEC's decision is the consumer. We've been noting the falling price of gasoline for months. On Friday the national average was down to $2.79 a gallon. That's the lowest price since 2009 and we are seeing forecast for gas to drop to $2.55-2.60 by Christmas. This is a godsend for most of Americans who are living paycheck to paycheck and spend most of their money on gas and food. Wal-mart (WMT) is the biggest retailer on the planet and their stock soared on Friday thanks to Black Friday headlines and the big drop in oil prices. Paying less at the pump for fuel means consumers can spend more inside Wal-mart.
There could be more unintended consequences by lower oil prices. The oil and gas industry is a big part of the global economy. Lower prices will mean less investment in drilling and production. We could see global GDP fall -0.5% or more as the energy industry adjusts for lower oil prices. Of course all the oil producing countries are receiving a lot less money for their exports so they'll have less money to spend as well.
Another potential consequence could be a dovish Federal Reserve. Falling energy prices will help keep inflation low in the U.S. That will allow the Fed to remain on the sidelines longer than we might expect. Citigroup has already moved their estimate for the first rate hike out to December 2015. We are seeing a few more analysts move their estimate for the first hike into 2016. That's good news for stocks. The stock market tends to go down in the first few months of a Fed rate hike cycle.
It was a busy week for economic data in the U.S. The Chicago PMI for October declined from 66.2 down to 60.8 but still in positive territory. Durable goods orders rose +0.4%. That followed an upwardly revised +0.9% the prior month. If you exclude the volatile transportation component then durable goods orders actually fell -0.9% in October following the prior month's +0.2% gain.
New home sales improved from +0.4% in September to +0.7% in October. Yet pending home sales came in worse than expected with a -1.1% drop in October. The Case-Shiller 20-city home price index rose almost +5% in September.
Plunging oil and gasoline prices appear to be boosting morale. The final Consumer Confidence number was revised down from 94.1 to 88.7 in November but this remains a very healthy reading. The University of Michigan Consumer Sentiment survey also dipped with a pullback from 89.4 to 88.8 but still near seven-year highs. Meanwhile the U.S. Q3 GDP estimate was expected to decline from +3.5% growth to +3.3% growth. Yet the last week's release said GDP actually increased +3.9%.
Overseas Economic Data
It was a quiet week for economic data overseas. Germany said its Q3 GDP estimate was unchanged at +0.1% quarter over quarter. Italy saw its retail sales come in worse than expected with a -0.1% decline. In Asia investors were still reacting to the surprise rate cut by China the prior week. Meanwhile Japan continues to sink closer and closer toward deflation. Japan's latest consumer price index (CPI) reading dropped -0.9%. Household spending in Japan plunged -4%. The country is seeing a rash of bankruptcies as their currency plummets.
The S&P 500 almost broke its trend of weekly gains but the +0.2% advance for the week means the index is up six weeks in a row. That's the longest winning streak this year. Thus far the S&P 500 is up +11.8% in 2014. That's on top of last year's +30% gains.
There has been some talk about the S&P 500 rising above its simple 5 day moving average. Currently the index has closed above its 5-dma 29 days in a row. That's an all-time record since they began keeping track this sort of data back in the 1920s. All that really tells us is that the S&P 500 is very, very short-term overbought and way overdue for a dip.
How overbought is the S&P 500? This chart shows that 84% of its 500 components are above their 50-dma. You'll notice that the market's rally tends to run out of steam when this number rises into the 84-88% range. We may not be at a top but we are definitely close to one.
50-dma percent chart of the S&P 500 index:
Technically we could look for support at the 10-dma but that's not deep enough. Prior resistance at 2040 could be short-term support. Yet a simple -2% pullback would mean a decline to 2025. A normal -5% pullback would mean a dip to 1963.
The S&P 500 is currently up +13.5% from its October lows near 1820. I've put a Fibonacci retracement tool on the daily chart. You can see a 23.6% correction is about 2015. Additional levels to watch would be 1980 and 1950. At the moment I would actually be surprised if the S&P 500 were to trade under the 2,000 mark before the year ends. We have less than five weeks left in 2014. There are too many investors praying to buy a dip.
chart of the S&P 500 index:
The NASDAQ composite has been the relative strength leader. Last week's gain puts the winning streak at six weeks in a row and the NASDAQ is now up +14.7% for the year. This index is also very short-term overbought. As expected the NASDAQ is leaping from round-number resistance markers every 100 points. It's currently testing the 4800 area. On a pullback we can look for short-term support at 4700 and then 4600. A simple -2% dip would mean a drop toward 4700. While we should not be surprised to see a big pullback in the NASDAQ I'm not expecting one in December.
chart of the NASDAQ Composite index:
The small cap Russell 2000 index is probably the most troubling among the major indices. The $RUT has been churning sideways the last four weeks in a row. The index displayed relative weakness on Friday with a -1.4% decline and now it's only up +0.8% for the year.
The big cap stocks have been leading the market so it's hard to put too much emphasis on the $RUT but we could use it as something of a sentiment indicator and a potential warning signal if the $RUT really accelerates lower.
I warned readers last week that the 1185-1190 zone was new resistance. The old highs near 1210-1215 are likely an obstacle as well. I'd watch the 200-dma near 1150 as support.
chart of the Russell 2000 index
Economic Data & Event Calendar
It's a new month and that means lots of new economic headlines. This week will see plenty of reports in the U.S. The ISM on Monday is expected to dip less than a point to 56.0. The big report for the week will be Friday's non-farm payrolls jobs report. Economists are expecting +235,000 new jobs while the unemployment rate is expected to be unchanged at 5.9%.
The bigger story could be the ECB meeting on Thursday. The ECB has been telling the markets they will boost their QE program but they have been short on details.
Economic and Event Calendar
- Monday, December 01 -
ISM index for November
Eurozone manufacturing PMI
- Tuesday, December 02 -
Auto & Truck sales
- Wednesday, December 03 -
Eurozone Services PMI
ADP Employment Change Report
ISM Services index
Federal Reserve Beige Book report
- Thursday, December 04 -
Weekly initial jobless claims
European Central Bank (ECB) decision on rates
ECB President Mario Draghi press conference
Bank of England decision on rates
- Friday, December 05 -
Unemployment Rate for November
Non-farm Payrolls (jobs) Report for November
Additional Events to be aware of:
December 17: FOMC meeting
The U.S. market could see a little Thanksgiving hangover on Monday. On Sunday night Bloomberg reported that Black Friday sales did not meet expectations. The National Retail Federation (NRF) issued a statement saying that traffic was expected to dip from 140.3 million last year to 140.1 million this year but their estimates suggest only 133.7 million people hit the stores. The NRF also warned that consumer spending over the four-day holiday shopping spree dipped from $57.4 billion in 2013 to only $50.9 billion this year. That could definitely spark some profit taking in the consumer-related stocks.
It's also going to put a lot of focus on Cyber Monday sales. Cyber Monday sales will be the main story tomorrow. Analysts expect a significant jump from last year. However, after the NRF estimates above, one has to wonder if the Cyber Monday headlines might disappoint. I suspect that this story about retail sales and cyber Monday sales could be suffering from retailers extending their sales. Instead of a Black Friday event many retailers had deals all week long. That could extend toward online deals as well. So instead of one big crush of traffic on Friday or Monday the real impact may have been spread out over several days.
I mentioned the ECB meeting earlier. Europe is sinking into an economic morass and it may not escape. The region seems to be slipping closer and closer to deflation (just like Japan). The Eurozone's unemployment is stuck at 11.5%. Big chunks of the regions are in recession or showing zero growth. Inflation for the Eurozone is at five-year lows. Everyone expects ECB President Mario Draghi to announce new stimulus measures on December fourth. If he does not it could be a huge disappointment for the markets. One analysts at BNP Paribas suggested that Draghi will use the falling inflation numbers as an excuse to justify the ECB boosting its asset purchase program. Credit Suisse is expecting the ECB to announce they will start buying sovereign bonds. Whatever Draghi announces it could move the market on Thursday.
The U.S. market at new highs has not deterred fund manager Jeremy Grantham. He is the co-founder and chief investment strategist at Grantham Mayo van Otterloo (GMO) management firm. They have over $120 billion under management. Grantham's latest quarterly letter to clients said he expects the S&P 500 could rally another +10% from 2,040. He expects the market will run "deep into bubble territory" and then it will crash "as it always does".
Bullish momentum certainly favors Grantham but the bull market is getting old. The average bull market lasts 165 weeks. Our current bull market is 298 weeks old and the second longest bull market in the last 85 years.
I don't see any big changes from last week's commentary on the market. The trend is up but we're significantly overbought and due for a dip. However, any pullback will likely be shallow. Keep in mind that even a -2% drop from current levels will feel painful. Fortunately, there is a crowd of investors just waiting to buy the dip. The average fund manager is underperforming the market (yet again) and will be chasing performance. December could see some tax-loss selling before year end. That means losers will likely get worse and winners could see more money chasing performance. There are no guarantees in the market and while we are overbought now we could stay overbought the rest of the year.