It was a rough week for stocks. A plunge in crude oil crushed energy-related stocks. Meanwhile a flurry of negative headlines sunk names related to retail. The major U.S. indices all posted widespread declines. The S&P 500 snapped a six-week winning streak. The profit taking was so bad that the S&P 500 erased the prior three week's worth of gains. Virtually no sector or industry was spared. The transports fell -2.8% for the week. Banks dropped -3.74%. The SOX semiconductor index fell -4.8%. Commodities continued to sink as well with losses in gold, silver, and oil. The DBA powershares agriculture (commodity) ETF, which tracks 11 different commodities, fell to new all-time lows last week. No inflation here!
Crude Oil Moves
Crude oil was grabbing a lot of attention last week. The commodity plunged -8.5% and closed the week near $40.70 a barrel. The market is watching to see if oil will break down below round-number support at $40. This oil weakness fueled a -5.6% drop in the OIX oil index and a -4.3% decline in the oil service names.
The reason behind oil's weakness is rising inventory and slowing demand. U.S. oil inventories added +4.2 million barrels to 487.0 million. We are quickly approaching the 80-year highs of 490.9 million barrels.
The total inventory number is likely to climb. Iraq oil production has surged and they are aggressively fighting for market share against its Middle East neighbors. Iraq has priced their oil more than $5.00 below the benchmark and a flood of it is headed for the U.S. with almost 20 million barrels on its way. Combine that with the backlog of oil tankers lined up to enter Houston and we could see a surge in oil inventories soon. Weather and fog conditions have stalled deliveries. Now there are almost 40 oil tankers lined up and waiting to deliver oil to refineries in Houston.
The IEA made headlines last week with their report suggesting global crude oil inventories are at record highs near 3 billion barrels. According to the IEA, oil inventories are rising +1.6 million barrels a day and would rise even faster when Iran and Iraq boost production early next year. At the same time the IEA warned that demand for oil was slowing down. They are now forecasting demand growth for oil to drop from +1.8 million barrels a day in 2015 to +1.2 mbpd in 2016. Odds are really good oil is going to have a hard time rising with so much supply fighting for demand.
Retail Outlook Sours
It was a terrible week to be in most retail names. Department store giant Macy's (M) reported Q3 earnings above estimates but then guided Q4 below analysts' estimates. The stock crashed on its lowered guidance. Nordstrom (JWN) missed earnings estimates and also guided lower. Their stock plunged as well. Accessories and watch maker Fossil (FOSL) beat the EPS estimate but missed the revenue number. They also lowered guidance below Wall Street expectations and their stock plummeted on the bearish outlook. On Friday morning the monthly U.S. retail sales numbers came in below expectations.
The XRT retail ETF lost -8.5% for the week.
Worries about a weak holiday shopping season are rising. Steve Odland, CEO of the Committee of Economic Development, commented on the retail sector on Friday, saying, "you're going to see a bloodbath here. Every retail CEO this morning is looking at this saying, 'OK, it's clearance time,' which means margins are going to get hammered here for the holidays and that's why the whole retail sector is down here this morning."
The Super Bowl of retail is Black Friday, which is only two weeks away.
(soon followed by Cyber Monday).
U.S. business inventories rose +0.3% in September. Analysts were forecasting no change (+0.0%). This buildup in inventories could suggest a slowdown in spending. Inventories at manufacturers were down -0.37% but inventories at retailers were up +0.79%. The total inventory/sales ratio inched higher to 1.38 months. That is the highest reading since June 2009.
The U.S. Producer Price Index (PPI), a gauge on wholesale-level inflation, fell -0.4% in October. There was no revision for September's -0.5% decline. It was the second monthly decline in a row for the headline PPI number. The prior 12 months ending in October has seen the PPI plunge -1.6%, which is the largest decline on record. This lack of inflation (or dare we say deflation) does not support a Fed rate hike.
A few paragraphs above I mentioned the disappointing retail sales figures. The October retail sales number came in at +0.1%. Economists were hoping for +0.3%. Year over year the retail sales numbers are down -1.7%. The prior two months of retail sales were revised lower. Falling prices at the gasoline pump saw fuel sales drop for the fourth month in a row.
The risk of recession in the U.S. is rising. Orders for machinery and transportation equipment are in decline. This normally precedes a recession. If you listen to executives in the industrial sector their businesses are already in a recession (or worse). The impact of a rising U.S. dollar is going to make this worse.
Evidently someone forgot to tell consumers that the economy was slowing down. The preliminary read on the University of Michigan Consumer Sentiment index for November showed a rise from 90.0 in October to 93.1. Analysts suspect that falling gas prices helped boost this sentiment number. The six-month expectations component hit its highest level since June. Investors should note that this poll was taken prior to the market plunge last week and prior to the terror attack in Paris on Friday. These events could impact the next survey on consumer sentiment.
Overseas Economic Data
China helped launch the market's decline last week with disappointing trade numbers out last Monday. Their trade surplus hit 10-year highs as their trade balance rose to $61.64 billion. Imports plunged -18.8% and exports fell -6.9%, which was significantly worse than expected. It was the fourth decline in a row for exports.
China also reported that their retail sales for October rose +11% from a year ago, which was slightly ahead of estimates. Their industrial production rose +5.6% in October, slightly below the prior month's reading. The country said their CPI fell -0.3% in October, down from +0.1% the prior month. China's PPI plunged -5.9% from a year ago.
There was a lot of data out of Europe last week. Unfortunately the news fueled worries about growth and European stocks suffered their worst week in two months. France reported their industrial production for September only rose +0.1%, down from +1.7% in August. Italy's industrial production improved +0.2% in September, down from +1.0% the prior month. The 19-country Eurozone said their industrial production fell -0.3% in September. That followed a -0.4% decline in August.
Italy reported their Q3 GDP growth was +0.2% but that was down from +0.3% in Q2. French GDP rose +0.3% in Q3, which is an improvement from +0.0% the prior quarter. Meanwhile Germany, the largest EU economy, said Q3 GDP rose +0.3% but that was down from +0.4% in Q2. Altogether the Eurozone Q3 GDP was only up +0.3%. That was below estimates and below Q2's +0.4% gain.
The S&P 500 index lost -3.6% last week. That knocked its 2015 performance to -1.74%. The index is down seven out of the last eight session. The retreat from its early November highs near 2,110 has sliced through several short-term support levels including the 2,060 area, the simple 200-dma, and the 2,040 level. You can see on the daily chart below the pullback stalled right at its 38.2% Fibonacci retracement of its prior six-week rally.
Currently the S&P 500 is hovering just above potential support at the 2,020 level. Normally, after such a sharp decline, I would look for a bounce from current levels. Unfortunately the market is going to react negatively to the terrorist attack in Paris. The European markets will likely plunge at the open on Monday and the U.S. market will follow suit. So the question now is where will investors buy the dip?
The simple 50-dma is at 2,007. I'd ignore the moving average and focus on the 2,000 level. If the S&P 500 breaks down below 2K then watch for potential support in the 1,980-1,960 region.
Daily chart of the S&P 500 index:
The NASDAQ composite plunged -4.26% last week. That slashed its 2015 gains to +4.0%. The breakdown below round-number support at the 5,000 level is disappointing as is the close below technical support at the simple 200-dma. Optimistically the NASDAQ has now filled the gap from October 23rd and could bounce. Sadly the reaction to the attack in Paris will likely spark another knee-jerk move lower on Monday morning. I would watch for potential support in the 4,800-4,850 region.
chart of the NASDAQ Composite index:
The small cap stocks were no exception to the market's widespread decline. The Russell 2000 index ($RUT) fell -4.4%. This puts its 2015 performance at -4.8%. The $RUT has fallen below multiple levels of short-term support and looks poised to test potential support at 1,140. Unfortunately I do not expect it to hold. Stocks will most likely spike lower on Monday morning as investors react to the terrorist attack in Paris. We should probably watch for potential support in the 1,100-to-1,120 region.
chart of the Russell 2000 index
Economic Data & Event Calendar
It's a busy week for economic data and events. The G20 two-day summit began today (Sunday). Japan will release their GDP growth estimate today. Economists are forecasting Japan GDP fell -0.3% in the third quarter.
The Bank of Japan holds a two-day meeting, which ends on Wednesday where they will announce their decision on interest rates.
The U.S. will hear from three different federal reserve regions (New York, Philadelphia, and Kansas City). The FOMC minutes will be reviewed for clues on the Fed's next meeting in December.
- Monday, November 16 -
New York Empire State Manufacturing survey
- Tuesday, November 17 -
Consumer Price Index (CPI)
NAHB Housing Market Index
- Wednesday, November 18 -
Bank of Japan interest rate decision
Housing Starts & Building Permits
FOMC Minutes from the last meeting
- Thursday, November 19 -
Philadelphia Fed manufacturing survey
- Friday, November 20 -
Kansas Fed manufacturing survey
Additional dates to be aware of:
Nov. 26th - Thanksgiving holiday (markets closed)
Nov. 27th - Black Friday, stock market closes early @ 1:00 pm
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)
As we look ahead the market seems worried about slowing growth in the U.S. and lack of growth overseas. There is no inflation growth in the U.S., which will make it very hard for the U.S. Federal Reserve to claim they are raising rates due to data. They might raise rates anyway just to maintain their credibility after a year of promising to hike rates in 2015.
Jeffrey Gundlach, the CEO of DoubleLine Capital, a very influential bond investor and money manager, spoke to investors on a conference call last week. According to Bloomberg, Gundlach is worried about the impact of the Fed raising rates on the dollar and the stock market.
Bloomberg published some quotes from Gundlach, "A December interest rate increase would threaten U.S. stock and bond markets while potentially driving up the value of the dollar to the point where it weakens the economy. I have a hard time believing a Fed tightening will help the economy. I think
volatility will increase and the economy will weaken." According to Gundlach, the threat of higher rates "will hurt the stock market."
Currently the Federal Reserve is on track to raise rates in December. At the same time Europe is set to lower rates. European Central Bank President Mario Draghi has already hinted, multiple times, that the ECB is ready and willing to do more with their QE program to boost Europe's economy. The markets expect Draghi to move at the ECB's December meeting with some form of additional stimulus or lower rates (some ECB interest rates are already negative). It's an interesting situation for central banks. The last time the U.S. Fed was raising rates while Europe was lowering rates was 1994.
Did you know that 20% of Americans' annual turkey consumption happens on Thanksgiving? The country will consumer nearly 49 million turkeys over the Thanksgiving holiday. The bad news is that bird flu has driven up prices turkey prices. Most of the headlines this year over the widespread outbreak of bird flu was focused on chickens and egg production. Unfortunately, turkeys were affected too. Almost eight million turkeys were destroyed due to avian flu. That means tighter supplies are going to drive prices higher.
My market bias remains bullish between now and yearend. I warned readers last weekend that after a six-week rally the U.S. market was due for a pullback. The stock retreat occurred right on cue. Now I would look for the market to bounce. However, first, stocks will most likely see a knee-jerk reaction lower on Monday morning as investors react to the Friday night terrorist attack on Paris. S&P futures are already negative.
The bigger picture is positive. Seasonal trends favor the bulls. Historically the week before Thanksgiving and the week of Thanksgiving have a bullish bias.