It was another volatile week for the stock market. That seems to be a trend lately with big swings both directions. Last week the market plunged lower on Monday on continued worries over a global growth slowdown. The S&P 500 finally started to bounce on Tuesday after coming within four points of its August-correction lows (which is 1,867). There were a number of stories that moved the market including a sharp sell-off in Glencore, the end of the third quarter, and a big batch of economic reports including the monthly jobs data. The September jobs number was a huge miss but stocks reversed sharply higher fueled by short covering into the weekend.

The S&P 500 index fell -2.6% last Monday. It was a 98% down day for the 500 S&P components. Glencore (GLCNF), which is not an S&P stock, was a major weight on the market. Glencore is Swiss company. They are a giant in the commodity business. A very bearish analyst report suggested GLCNF's stock could plunge to zero if commodity prices remain depressed.

Shares of GLCNF fell -29% on Monday to close at $1.07 a share. There were big worries about GLCNF's $30 billion debt and if they could remain solvent. Folks were comparing Glencore to Lehman Brothers and worried that if Glencore failed it could undermine the whole system. The good news is that Glencore is not big enough to be a system-wide shock. Secondly Glencore outlined how they have plenty of credit and how they are in no danger of failing. Several analysts also defended the company. The stock manufactured a big bounce and actually closed the week with a gain (and a +42% bounce from close on Monday).

IMF Warning

The International Monetary Fund (IMF) made headlines last week. The IMF's managing director, Christine Lagarde, spoke midweek and shared her concerns about the global economy.

"The prospect of rising interest rates in the United States and China's slowdown are contributing to uncertainty and higher market volatility. There has been a sharp deceleration in the growth of global trade," she said. "And the rapid drop in commodity prices is posing problems for resource-based economies."

The good news had been the modest pick-up seen in developed countries, Lagarde said, but this was offset by the fifth year of declining growth rates in the emerging world.

"India remains a bright spot. China is slowing down as it rebalances away from export-led growth. Countries such as Russia and Brazil are facing serious economic difficulties. Growth in Latin American countries, in general, continues to slow sharply." Source: the Guardian

Lagarde warned that current IMF forecasts for global growth are too high. The IMF will need to downgrade their current forecasts for 2015 (+3.3%) and 2016 (+3.8%) due to the serious weakness in emerging markets. The world economy has slowed to its lowest level since the "Great Recession" of 2009.

Q3 Results

Wednesday was the end of 2015's third quarter. The S&P 500 lost -6.9%. It was the market's worst quarter since 2011. The NASDAQ composite fell -7.4%, which snapped its 10-quarter winning streak. The Dow Jones Industrial Average gave up -7.6% and posted its third consecutive quarterly loss for the first time since 2009. It was an especially ugly quarter for biotech stocks. The IBB biotech ETF, which tracks the NASDAQ biotech index, lost -17.8%, its worst performance since 2002.

Commodities also suffered significant declines. Gold lost almost 5% to mark its worst quarter since Q3 last year. It was also gold's fifth quarterly loss in a row. Meanwhile WTI crude oil plunged -24% in Q3, which helped drive energy stocks lower.

It's not just the U.S. International markets are also suffering. According to CNBC these markets are in correction mode (-10% or more): Switzerland, Italy, India, Canada, UK FTSE 100, France, STOXX Europe 600, Japan, and Spain. While the following markets are in bear-market territory (-20% or more): Portugal, Germany, Argentina, Brazil, Hang Seng, Russia, Greece, China Shanghai, China Shenzhen. CNBC Q3 results. Globally investors had a tough time as world markets lost $11 trillion in value during the third quarter.

If you had a rough quarter you are not alone. According to JP Morgan almost 70% of mutual funds underperformed their benchmarks in the third quarter. Evidently everyone owned a lot of healthcare stocks and the -11% drop in healthcare crushed everyone's results. Pros Underperform.

Economic Data

There was a parade of economic data last week. The Conference Board said their Consumer Confidence Index improved from 101.3 to 103.0 in September. The Case-Shiller 20-city Home Price index rose +5.0% in July. U.S. construction spending for July was revised down from +0.7% to +0.4% but August came in at +0.7%.

Consumers are still buying cars. The September estimate puts the seasonally adjusted annual rate (SAAR) at 18.03 million vehicles in the U.S. That's a +10% jump from a year ago and up +1.7% from August. It's the best year since July 2005. All of the major U.S. automakers reported strong sales in September. General Motors (GM), the largest, said sales rose +12%.

The Chicago PMI was a big disappointment with a drop from 54.4 in August to 48.7 in September. Meanwhile the national ISM manufacturing index fell from 51.1 to 50.2 in September. The economic slowdown overseas and the strong dollar is really hurting U.S. manufacturing. September's 50.2 reading was worse than expected and borders recession territory. Readings for the Chicago PMI and ISM are based on a scale with numbers below 50.0 mean economic contraction. The ISM reading at 50.2 is the lowest level since May 2013. Along these same lines the monthly factory orders showed another drop. August factory orders were down -1.7% for the month, which was worse than expected and the biggest monthly decline all year. It was also the tenth month in a row that factor orders retreated.

Monthly Nonfarm Payrolls (jobs) Report

The ADP National Employment Report on Wednesday was in-line with expectations at +200,000 jobs last month. This reasonably healthy ADP number set the market up for a shock when the Friday morning nonfarm payroll report was released. Economists were expecting September jobs to come in at +203,000 and they also expected the August number to be revised higher. Unfortunately job growth slowed significantly.

The government announced we only added +142,000 in September. Meanwhile the August report was revised lower from +173K to +136K. July's was also revised lower from +245K to +223K. Add up the downward revisions and the miss from September and job growth fell -180,000 jobs less than expected. It was not a good report.

The three-month moving average for the monthly job report has fallen to +167,000. That is significantly below the +200,000 a month the Federal Reserve would like to see. Currently the average monthly job report for 2015 is at +198K versus +260K in 2014. The average number of hours worked fell to 34.5 hours, which is not a good sign. Rising hours works normally precede strong job gains.

The unemployment rate was unchanged at 5.1%. Unfortunately that does not tell the whole story. Another 579,000 people left the workforce. That pushed the labor force participation rate from 62.6% to 62.4%, which is a low not seen since October 1977. A record 94.6 million Americans are not in the workforce.

Chart of the Labor Force Participation

The huge miss on the jobs report had an immediate impact on the Fed Funds Futures rate, which predicts when the Federal Reserve will raise rates. Fed heads have been talking up a potential rate hike at the October meeting for two weeks. Yet the Fed Funds Rate saw the odds of a hike in October plunge from 18% to 8% (and hit an intraday low of 2%). Odds for a rate hike in December fell from 47.5% to 28.2%. January dropped from 53.8% to 36.9% and March 2015 saw odds of a rate hike slip from 66.7% to 50.7%.

The Federal Reserve has been widely criticized for not raising rates at the September meeting. Suddenly it looks like they made the right call. We have falling jobs growth, U.S. manufacturing near recession territory, a strong dollar, weak commodities, and a global slowdown. If the situation doesn't improve soon there are some on Wall Street that believe the Fed might be talking QE4 to stimulate the economy instead of a rate hike. The yield on the 10-year U.S. bond fell to 1.99%, which suggest the bond market does not expect a rate hike any time soon.

The Atlanta Fed publishes a weekly forecast with their GDPNow estimate. Last week the GDPNow estimate saw Q3 growth estimates plunge from +1.8% to +0.9%.

Chart of the GDP Now estimate

source.

Overseas Economic Data

Last week the Reserve Bank of India cut their main interest rate from 7.25% down to 6.75%. We will hear from more central banks in the week ahead.

China reported that their industrial profits plunged from -2.9% to -8.8% from a year ago. This fueled speculation that the Chinese government might add more stimulus to boost their economy. They probably need it. The official Chinese manufacturing PMI reading for September came in at 49.8 from 49.7. The final reading on the Caixin manufacturing PMI was 47.2. Numbers below 50.0 suggest economic contraction.

Japan sais their industrial production in August fell -0.5% while retail sales rose +0.8%. Both were below expectations. Japan's industrial production has fallen three months in a row. Household spending improved +2.5% in August. That was actually way above estimates. The Bank of Japan meets this week. A few days ago Bloomberg suggested the BoJ would not add any additional stimulus at this time.

Most of the economic data out of Europe was flat to down. The region is still suffering from deflationary pressures. The Eurozone said their CPI reading for September fell -0.1%, which was worse than expected. Eurozone PPI dropped -0.8%, down from -0.1%. It's down -2.6% from a year ago. The Eurozone's unemployment rate was unchanged at 11%. Their manufacturing PMI for September was also unchanged at 52.0. Germany's manufacturing PMI slipped 0.2 to 52.3. France's PMI inched higher to 50.6. Italy's declined from 53.8 to 52.7. Spain's fell as well with a drop from 53.2 to 51.7.

The week ahead will see headlines about Germany marking the 25th anniversary of their reunification. Meanwhile Portugal holds parliamentary elections today (Sunday, October 4th).




Major Indices:

Monday's big drop in the S&P 500 was its fifth decline in a row and its seventh out of the prior eight sessions. The index spent the rest of the week recovering with a four-day bounce. Friday's move was significant. The S&P 500 plunged -30 points at the open and then reversed higher into a +28-point gain (a 58-point rebound). The Dow Industrials saw a +458-point reversal higher.

The trader chatter on Friday doubted the strength of this bounce. Friday was the second day of a new month. Mutual funds had new money to put to work. A few buy programs kicked in on Friday. This probably sparked some short covering when there was no follow through lower on that huge jobs number miss.

The S&P 500 sits just above support/resistance at the 1,950 level. The 1,990, 2,000, and 2,020 levels are all overhead resistance. The simple 50-dma is falling and will add resistance to the 2,000 area. I would not be surprised to see the S&P 500 churn sideways in a wide range until the Q3 earnings season begins in a few days.

Optimistically the low on Tuesday (1,871) was close enough to the August-correction low (1,867) that investors might consider it a bullish double bottom.

Year to date the S&P 500 is down -5.2%.

5-day chart of the S&P 500 index:

Daily chart of the S&P 500 index:

The NASDAQ composite pierced the 4,500 level again but has staged a big rebound off its lows. Friday added 80 points thanks to the 155 point bounce off the Friday morning low.

The 4,800 to 4,950 area has a lot of potential resistance, especially around the 4,900 level. The 50-dma and 200-dma add extra technical resistance in that region. The bounce might continue on Monday but it may not get very far. Year to date the NASDAQ is only down -0.6%.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index ($RUT) continues to underperform but it may have put in a short-term bottom last week. The $RUT fell to new 2015 lows last week. On the plus side the index found support near the 1,080 level. If this bounce continues it could make it up to the 1,140-1,160 area before encountering any serious resistance. Of course we need to bear in mind that the trend for the $RUT is still lower. The 1,160 to 1,200 region could be a serious challenge for the bulls.

Year to date the $RUT is down -7.5%.

chart of the Russell 2000 index



Economic Data & Event Calendar

The pace of economic data slows down this week. We will hear from a couple of central banks (Japan and England). The International Monetary Fund (IMF) will be making headlines and the organization will release their World Economic Outlook on Tuesday.

The U.S. Energy Information Administration will provide their Short-Term Energy Outlook. The market will also be listening for any clues from the multiple Fed presidents speaking this week.

In non-economic news the Nobel Prizes will be awarded throughout the week starting on Monday. The Nobel Peace Prize will be awarded on Friday.

- Monday, October 05 -
Eurozone PMI
ISM Services

- Tuesday, October 06 -
German Factory Orders
IMF World Economic Outlook
EIA release short-term energy outlook

- Wednesday, October 07 -
Bank of Japan interest rate decision

- Thursday, October 08 -
Bank of England rate decision
FOMC minutes from the last meeting
ECB minutes

- Friday, October 09 -
Import/Export prices
Wholesale inventory data

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:

The last couple of weeks I have noted how earnings expectations continue to deteriorate. Wall Street is pretty bearish on earnings growth. If we are lucky expectations are too low and corporations will be able to deliver better than expected results. They key might be revenue growth and of course guidance for the rest of 2015 and into 2016. If guidance is too bearish it could further sour investor sentiment.

Investor Sentiment

Speaking of sentiment, it's already sour. The weekly survey by the American Association of Individual Investors (AAII) saw bullish sentiment fall -4.0% and neutral sentiment drop -7.2%. All of them defected to the bearish camp with bearish sentiment rising +11.2%.

Investor Sentiment Survey (AAII)

Source: AAII

Last week's +11.2% surge in bears is the biggest one-week move since early July. Bullish sentiment hit new multi-week lows. The long-term average is 38.75% for bullish sentiment. Last week marks the 27th week in a row that bulls have been below average. It's also a record-setting 31 weeks since bullish sentiment was above 40%.

Contrarians could argue this overwhelming bearishness is a buy signal. They might be right with over 70% of investors either bearish or neutral on the market.

Seasonal Weakness

We just finished the second week of the worst three weeks of the year. Last week wasn't that bad with a big bounce of Monday's lows. I'd like to say that if we can get past one more week that we will be in the clear but these historical trends are just crude sign posts. They are not guarantees. I would approach the next two weeks with caution. Odds are still good we could see the market bottom in the middle of October. The plan would be to use any temporary weakness in the next couple of weeks as an entry point to set us up for a fourth quarter rally.

Normally the S&P 500 averages a +2.6% gain in the fourth quarter and history says Q4 is positive 72% of the time. However, when the market is negative going into Q4 (like we are today) then the fourth quarter is actually negative 47% of the time with an average return of -0.7%. We can be optimistic but I would not blindly bet on a Q4 surge. With only three months left in the year a few Wall Street analysts have been downgrading their 2015 price targets for the S&P 500.

Q3 earnings season will be crucial in setting the tone for the next several weeks. If results are too low or if corporate guidance is too bearish then it could sabotage any Q4 rebound. Alcoa (AA) kicks off earnings season on October 8th.

The big takeaway from last week might be how the United States is not immune to the global economic slowdown. The negative Chicago PMI and disappointing industrial production numbers combined with a significantly worse than expected jobs report does not paint a very healthy picture for the U.S. economy.

~ James