Stock markets were in widespread decline around the world offering a sour start to the fourth quarter. Disappointing economic data continues to dominate the headlines with the ISM data overshadowing improvements in consumer spending and pending home sales. After one of the best quarterly performances in years money managers could be locking in some gains but the long-term trend is still up. A rebound in the dollar is putting pressure on commodities, which is exacerbating the sell-off for some sectors.
Asian markets were quiet with both the Chinese Shanghai and Hong Kong Hang Seng markets closed for holiday. The Japanese NIKKEI lost 1.5% as the yen rose against the dollar. In Europe the selling pressure was widespread with most of the major exchanges down three days in a row and hitting new three-week lows. The English FTSE lost 1.6%. The French CAC-40 gave up 1.9%. The German DAX fell 2.1%.
Yesterday the Chicago PMI came in worse than expected and investors worried that the National ISM data would disappoint. Sure enough it did. The Institute for Supply Management said their manufacturing activity gauge fell from 52.9 in August to 52.6 in September. Economists were forecasting a rise to 54. Technically the report is still positive with readings over 50 indicating expansion and growth. This is the second month in a row the ISM manufacturing index has been in positive territory.
The markets were also disappointed with the weekly initial jobless claims. The Labor Department said new weekly claims rose to 551,000. Analysts were predicting a very small rise from 534,000 to 535,000. While these numbers get revised all the time Friday's gain ends a three-week slide for jobless claims. More importantly it casts additional doubt on the non-farm payrolls (jobs) report due out Friday morning.
We did see some positive news today. The Commerce Department said August consumer spending surged by the biggest amount in several years. A few analysts blame the "cash for clunkers" program for skewing the numbers but consumer spending rallied 1.3% in August while incomes rose 0.2%. Economists had been expecting spending to rise +1.1%. There is already concern that this pace may be unsustainable thanks to rising unemployment figures.
The National Association of Realtors (NAR) reported that pending home sales in August soared 6.4% from July to a reading of 103.8. Analysts were expecting a rise to 98.6. I strongly suspect this has already been baked in. August is typically the peak for real estate market and this year it was even more so since the new-buyer tax credit is set to expire on November 1st. That means consumers were rushing to sign contracts in time to close before the tax credit expires. If congress doesn't renew the tax credit we could see a very sharp decline in sales for the housing market.
In other news construction spending jumped significantly higher than expected. Economists were looking for a 0.2% drop in construction but spending rose 0.8% in August. A 4.7% surge in residential construction was the largest one-month jump since the early 1990s.
Federal Reserve Chairman Ben Bernanke was making headlines today as he testified before the House Financial Services committee. Bernanke said that unemployment could stay above 9% even as the economy rebounded back into positive territory. He was asked if the commercial real estate market was a problem and he replied, "I don't think so. But we'll have to watch it carefully."
Currently the stock market is suffering a very broad-based decline. The only sector index I see in positive territory is the railroad sector with a 0.2% gain. Losses are being led by the financial stocks and anything commodity related. The S&P 500 index is off 2% at 1035 and flirting with a 50% retracement of its September rally. The NASDAQ composite is down 2.5% at 2068. The Dow Industrials are down 1.5% and back under the 9600 level. The small cap Russell 2000 index is down 2.7% and testing its 40-dma, which was support back in early September.
Let's take a quick look at charts for the major averages:
Chart of the S&P 500:
Chart of the NASDAQ:
Chart of the Dow Industrials:
Chart of the Russell 2000 index:
The market is in sell-off mode so it's not surprising to see some sharp declines on the play list. ATI is off 3.6% but has yet to test support near $32.00. Readers may want to exit the BBY play with the stock breaking its trendline of support. CAT has punctured the $50.00 mark and hit our trigger to buy calls at $50.00. Coal stock CNX is off 3.3%. I would look for a dip or a bounce near $42.00 as an entry point. HP's pull back is providing another entry point near $38.50. SPW has pulled back toward support near $58.00 and hit our trigger to buy calls. SOHU is off 4% and testing support near $66.00. WFC has lost almost 3.6% and hit our stop loss at $27.25.