It was a rough week for the U.S. stock market with all the major indices posting losses. Monday's gain was the only positive session in the last seven trading days for the S&P 500. The index is down more than 6% for the quarter and headed for its worst quarterly performance in four years.

There were a ton of headlines last week from biotech weakness to the Pope visiting America, Speaker for the House John Boehner abruptly resigning, and Chinese President Xi Jinping visiting the U.S. That's on top of a handful of Federal Reserve members speaking and a high-profile speech by Fed Chairman Janet Yellen on inflation. Nothing seemed to slow the sell-off in stocks.

There are only three trading days left in the third quarter and 2015 gains are few and far between. The NASDAQ Composite, Dow Jones Industrials, S&P 500, and small cap Russell 2000 index are all negative for the year. Last week's decline pushed the transportation average to a -14% loss for 2015. The SOX semiconductor index is down -13.6% year to date. Banks managed a bounce last week but they're still down -5% for the year.

Crude oil eked out a small gain for the week but is down -15.5% for 2015. This has produced big declines for energy-related stocks. The oil index is down -21% for the year while the Oil Services index is down -22%.

Biotechs were getting a lot of negative attention last week. It started on Monday when presidential hopeful Hillary Clinton tweeted that she would introduce a new plan to prevent price gouging by specialty drug makers. This sparked a weeklong sell-off in biotechs. The NASDAQ Biotechnology index (NBI) plunged -4.9% on Friday and fell -13% for the week. It's now in bear-market territory (-20% or more from its highs). There are 144 components in the NBI and most of them have been seriously damaged in the last few weeks.

Investors can trade the NBI through the IBB biotech ETF.

Chart of the NASDAQ Biotech Index

Washington Politics

The surprising headline on Friday was Speaker of the House John Boehner's announcement that he was resigning. The Speaker has been under fire from conservatives in the Republican party for years. Now there is speculation on how his resignation would impact the budget battle brewing in congress (again). This coming Wednesday, September 30th (end of the third quarter), is the deadline to avoid a government shutdown.

Conservatives in the Republican party want a clause that eliminates federal funds for Planned Parenthood in the spending bill. Democrats oppose any such measure and President Obama has promised to veto any bill that defunds Planned Parenthood. It's possible that we might get past a shutdown this week only to see the threat of a government shutdown return on December 11th over the U.S. debt ceiling.

A temporary government shutdown is unlikely to have much impact on corporate earnings but it will probably be market negative for investor sentiment.

Economic Data

New home sales in the United States rose +5.7% in August. July's number was revised higher from an annual pace of 507,000 up to 522K. August' number was 552,000. That was 37,000 higher than expected and the best reading since February 2008.

Exiting home sales slipped to an annual pace of 5.31 million homes. While this was just a little less than expected it is still the sixth month in a row above five million units. Home price appreciation slowed from +6.5% a year to +4.7%.

Durable goods orders fell -2.0% in August while the July number was downgraded from +2.2% to +1.9%. The volatile transportation component fell -5.8%. Excluding transportation the durable goods number was flat, following a +0.4% gain in July.

The regional fed surveys continue to disappoint. The Richmond Fed index fell from zero to -5. The Kansas City fed survey improved from -9 to -8. These followed very negative results from the New York and Philadelphia fed survey's last week.

The Markit manufacturing PMI reading was unchanged at 53. Numbers above 50 suggest growth but at 53 this is the lowest reading since October 2013.

Last week saw the final adjustment on Consumer Sentiment for September. The headline number improved from 85.7 to 87.2 but it was still the third monthly decline in a row and a new 12-month low.

The big report at the end of the week was the final estimate on Q2 GDP growth. The government raised their estimate from +3.7% to +3.9%. That's a big improvement from the initial reading of +2.3%. It's also a nice jump from Q1's +0.6% gain. However, the boom could be short-lived. Right now the Atlanta Fed is forecasting Q3 GDP growth to fall back to +1.4% growth. The average analyst estimate is forecasting +2.5% Q3 GDP growth. The final Q2 number brings the first half of 2015 growth up to +2.25%.

Federal Reserve Rate Hike Dilemma

The Federal Reserve has been widely criticized for its failure to raise interest rates. Many believe the Fed missed their opportunity two weeks ago. For some the Fed has lost credibility while many more are frustrated with the Fed's confusing and often mixed messages with so many fed governors speaking on the subject. Jonathan Golub, RBC's chief U.S. market strategist, commented on the Fed's recent actions saying, "They took an unsettled situation and they just threw kerosene on that fire through all of their statements."

Federal Reserve Chairman Janet Yellen gave a speech on inflation this past week. Here is her summary at the end of the speech:

Given the highly uncertain nature of the outlook, one might ask: Why not hold off raising the federal funds rate until the economy has reached full employment and inflation is actually back at 2 percent? The difficulty with this strategy is that monetary policy affects real activity and inflation with a substantial lag. If the FOMC were to delay the start of the policy normalization process for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. In addition, continuing to hold short-term interest rates near zero well after real activity has returned to normal and headwinds have faded could encourage excessive leverage and other forms of inappropriate risk-taking that might undermine financial stability. For these reasons, the more prudent strategy is to begin tightening in a timely fashion and at a gradual pace, adjusting policy as needed in light of incoming data.

Conclusion
To conclude, let me emphasize that, following the dual mandate established by the Congress, the Federal Reserve is committed to the achievement of maximum employment and price stability. To this end, we have maintained a highly accommodative monetary policy since the financial crisis; that policy has fostered a marked improvement in labor market conditions and helped check undesirable disinflationary pressures. However, we have not yet fully attained our objectives under the dual mandate: Some slack remains in labor markets, and the effects of this slack and the influence of lower energy prices and past dollar appreciation have been significant factors keeping inflation below our goal. But I expect that inflation will return to 2 percent over the next few years as the temporary factors that are currently weighing on inflation wane, provided that economic growth continues to be strong enough to complete the return to maximum employment and long-run inflation expectations remain well anchored. Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter. But if the economy surprises us, our judgments about appropriate monetary policy will change.

Source.

Overseas Economic Data

Japan's QE program does not seem to be working yet. The country said their manufacturing PMI for September fell from 51.7 to 50.9. Numbers below 50.0 suggest economic contraction. Their national CPI (consumer inflation) only rose +0.2% for the month but it is down -0.1% year over year. That means Japan is seeing deflation for the first time in more than two years.

The market's are watching China now more than ever as investors worry the country's slowdown will impact the globe and the U.S. China has their own "Beige Book" modeled after the U.S. Beige Book. China's is a quarterly survey where the government survey's more than 2,100 companies across different sectors. The most recent China Beige Book shows that the country did indeed slowdown in the third quarter but there is no sign of an "impending collapse" in their growth.

Another troubling decline was China's PPI, a wholesale inflation gauge. The latest PPI fell -5.9%. This is the 42nd month in a row the PPI has declined, which is generating concerns about deflation.

Last week the Asian Development Bank downgraded their outlook on China's growth. They cut their forecast on Chinese growth from +7.2% to +6.8%. The official Chinese government forecast is still +7.0% for 2015.

One of the biggest headlines out of China last week was their preliminary September reading on the Caixin manufacturing PMI. This index fell from 47.3 to 47.0. Numbers below 50.0 suggest contraction and September's reading was a new 6-1/2 year low and marked the seventh monthly decline in a row.

Most of the headlines for China revolved around President Xi Jinping visiting the U.S. for a multi-day visit. Jinping met with Obama on Friday and the two agreed to a corporate espionage cyber warfare truce. I wouldn't bet on that agreement actually doing much. Both the U.S. and China have huge cyber spying and cyber warfare machines. They're not about to slowdown when it's so hard to prove an actual attack or hack came from an official government source.

Looking across the Atlantic Ocean to Europe there were not a lot of economic headlines. Most of the news was political or corporate. German car giant Volkswagen was the biggest story of the week. Last weekend it was unveiled that Volkswagen had installed a device on their diesel engine cars that would defeat U.S. emission testing and produce a fraudulent (passing) reading. Regulatory agencies around the world announced they will investigate. All the major car makers in Europe are now under scrutiny. The U.S. could levy significant fines against Volkswagen for the misconduct. The fines could run into the billions of dollars because we're talking millions of cars.

Shares of Volkswagen (VLKAY) plunged a combined -34% on Monday and Tuesday. The stock ended the week with a -29% drop. Volkswagen is busy firing people and trying to replace them with new leaders to show the world market that they're taking action.

This weekend the big story is an historic vote in Spain. The Catalonia region of Spain has been unhappy with the central government for years. This Sunday (today) the region held a vote to secede from Spain. The region saw record-breaking voter turnout. Exit polls suggest the separatists will win an absolute majority of nearly 79 seats in the 135-seat parliament. This will set the regional government of Catalonia on a collision course with Spain's central government, which does not want the area to secede. It could push Spain and the Eurozone into uncharted territory. source.




Major Indices:

The S&P 500 big cap index lost -1.37% for the week. It's now down more than -9% from its all-time high of 2,130 (set in May this year). According to Reuters the S&P 500 has gone 90 days without setting a new high, the longest stretch since August 2012.

Last week's decline was the second weekly loss in a row. That broke the S&P 500's trend of 10 alternating up and down weeks. The index's failure at short-term resistance near 1,950 doesn't bode well. The 1,900 level could still be support but odds are growing we'll see the S&P 500 test its August lows near 1,867. Year to date the index is down -6.2%.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ Composite had a rough week with a -2.9% decline. A plunge in the biotech sector weighed heavily on this index. Leadership in the big cap NASDAQ stocks is fading with more than 45% of the NASDAQ-100 stocks in bear-market territory.

The NASDAQ found new resistance in the 4,800 region this past week and Friday's failure definitely looks short-term bearish. The August low near 4,300 is another -8.2% drop from current levels.

Currently the NASDAQ is down -1.0% for the year and down -10% from its July high. That means the index is now in correction territory (again).

This weekend is the first time consumers can buy the new Apple (AAPL) iPhone 6S and 6S+. Analysts are expecting about 12 million phones sold this weekend. One analysts came out with a bullish forecast of 13-15 million units. If AAPL fails to hit the 12 million mark it could spark a sell-off in AAPL shares and that could drag the market lower.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index underperformed its big cap peers with a -3.5% drop for the week. It's now down -6.8% for the year. The $RUT looks headed for its August lows in the 1,100-1,105 region. A bounce there would look like a potential bullish double bottom pattern. A breakdown past 1,100 would definitely spell bad news for the broader market. The long-term weekly chart certainly looks bearish with the oversold bounce failing near prior support.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index



Economic Data & Event Calendar

The week ahead is a busy one for the economic calendar. Obviously the biggest report will be the monthly jobs number. Economists are expecting the September nonfarm payroll number to be +203,000. That's an improvement from August' +173K.

There is speculation that a jobs number above +225,000 could be the catalyst for the Federal Reserve to raise rates in October. Speaking of the Federal Reserve there is going to be a herd of Fed officials speaking this week. The one to listen to will be Fed Chairman Yellen who speaks again this coming Wednesday.

- Monday, September 28 -
Personal Income & Spending
Pending Home Sales

- Tuesday, September 29 -
Case-Shiller 20-city Home Price Index
Consumer Confidence

- Wednesday, September 30 -
Chinese PMI data
Federal Reserve Chairman Janet Yellen speech
ADP Employment Change Report
Chicago PMI data
Deadline for U.S. Government to Avoid a Shutdown

- Thursday, October 01 -
Eurozone manufacturing PMI data
ISM Index
Construction Spending
Auto & Truck Sales

- Friday, October 02 -
Nonfarm payrolls (Jobs report) for September
Unemployment rate
Factory Orders

Additional dates to be aware of:

Oct. 28th - FOMC meeting
Nov. 26th - Thanksgiving holiday (markets closed)
Dec. 16th - FOMC meeting, new forecast Dec. 16th - Fed Chairman Yellen's press conference
Dec. 24th - Christmas Eve (market closes early)
Dec. 25th - Christmas (market closed)

Looking Ahead:

A Spooky Q3 Earnings Season

Last week I noted that 90 of the S&P 500 companies had already warned about their Q3 earnings. That number has now jumped to more than 110 companies. Negative guidance has surged to 3.2 companies for every 1 company offering positive guidance. That's above the long-term average of 2.7 to 1, according to Thomson Reuters.

Overall forecasts are predicting a -3.9% drop in earnings from a year ago for the S&P 500. A lot of that is from the energy sector. Low oil prices will push energy companies to post an earnings drop of -65%. Revenues growth for the S&P 500 is expected to fall -3.3%. The strong dollar and a global economic slowdown will also play their part in depressing corporate results, especially for the S&P 500 companies who do a lot of business overseas.

Caterpillar scared the market on Thursday morning when the company lowered their 2015 guidance and announced plans to lay off 4,000 to 5,000 workers by the end of 2016. Total job cuts could hit -10,000 by 2018. CAT expects 2015 revenues to be $1 billion less than 2014's (about $48-49 billion) and will mark their third year in a row of falling sales. CAT's management also warned that 2016's revenues could be -5% less than 2015's. That would be the fourth year in a row of declining sales, which has never happened in the company's 90+ year history.

A terrible Q3 earnings season could spook investors and fuel another sell-off. However, there is also a chance that expectations are already so low that corporations will beat estimates. The market might see a relief rally because actual results were not as bad as expected. Earnings reports have already started but Q3 earnings season unofficially begins on October 8th, when Alcoa (AA) reports.

Bearish Investor Sentiment

Mark Hulbert, at Marketwatch.com, has noted that investor sentiment has turned very bearish. The Hulbert Nasdaq Newsletter Sentiment Index, or HNNSI, measures sentiment. The latest reading has hit bearish extremes not seen since the top of the Internet bubble in early 2000. If you are a contrarian investor then this is actually a bullish signal but that doesn't mean buy stocks now. David Aronson analyzed the data to refine the readings and come up with a purified HNNSI result. "To be sure, the purified HNNSI's record low doesn't guarantee that the market will immediately rally. As Aronson also points out, sentiment often will hit its low before the market does. So, even if contrarian analysis is ultimately right about the current market, it could still be that the correction's ultimate low is ahead of us." You can read more about it here.

The CNN Money Fear & Greed index is also suggesting that investors remain very cautious on the market. They explain how they generate their fear & greed numbers here.

CNN Money Fear & Greed Gauge

Seasonal Weakness

I have been warning investors about the seasonal weakness in September. Last week I noted that the next three weeks (last week plus the next two) are the worst three weeks of the year. Lately the seasonal trends have been on the mark. According to the research team at the Stock Trader's Almanac the week ahead tends to average -1.2% decline for stocks. Don't despair. I do have some good news.

Right now the S&P 500 is on track to post losses in both August and September for the first time since 2011. However, Q3 weakness tends to precede a strong Q4 performance. That's because October is a "bear killer" month. October has a history of volatility. There have been several market crashes and big declines occur in October including 1929, 1978, 1979, 1987, 1997, and 2008. Yet over the last 20 years October has developed a habit of rebounding off its early weakness and delivering strong gains by the month's end.

That means the mid-October lows, that usually occur in the first 10 to 14 days of the month, could be our next buying opportunity for bullish positions. Of course nothing is guaranteed. This year the trend could be upset by the ongoing Federal Reserve rate hike uncertainty, the slowdown in China, uncertainty in Europe, a potential U.S. government shutdown, ...pick your poison. There are always exceptions.

I'm still optimistic that stocks could rally between now and year end but the next two or three weeks could be challenging. We may not have seen the low yet. If we are lucky then stocks will bounce off their August lows. If not then stocks will pierce the August low and the market could see another capitulation sell-off before reversing higher.

~ James

"The future ain't what it used to be." ~ Yogi Berra (1925-2015)