Concerns over a slowdown in China and Europe weighed on equities. Altogether it was a down week for the major global stock markets but the U.S. markets fared better than its European counterparts. Both the S&P 500 and the Dow Industrials saw a three-day decline midweek but overall the pullback was mild. A number of reports on the U.S. housing market failed to spark any major movement in stocks. We saw a handful of earnings reports but these too failed to ignite any serious sell-off. The highest profile corporate announcement was probably Apple Inc.'s news of a highly anticipated quarterly cash dividend. Overall commodities were some of the worst performers in spite of a drop in the U.S. dollar. By Friday's closing bell the S&P 500 declined -7 points for the week. The NASDAQ composite was up 12 points. The Dow Industrials was down -150 points. The small cap Russell 2000 index fell less than 0.25 of a point.
In the U.S. the latest housing starts data fell from an upwardly revised 706,000 unit pace in January to a less than expected 698,000 in February. Building permits, which help forecast starts, rose from 682,000 in January to a better than expected annual rate of 717,000 in February. The monthly existing home sales data hit an annual pace of 4.59 million sales in February. This was slightly less than expected but the months of supply remains low at 6.4.
A positive economic data point from last week was the initial jobless claims that hit a multi-year low at 348,000. Meanwhile there were several corporate earnings reports from the likes of Oracle (ORCL), Discover Financial (DFS), Nike (NKE), FedEx (FDX) and Tiffany & Co (TIF). Results were mixed. FDX's announcement was probably the most troubling. The overnight freight company said the recovery isn't as strong as they expected and management lowered their earnings guidance.
The biggest economic event for the week was China's most recent PMI survey, which hit four-month lows. This immediately sparked fears of a global slowdown and fans the flames that China was seeing a hard landing. Adding fuel to the global slowdown fire was a disappointing PMI out of the Eurozone, which hit a new three-month low.
Depending on your bullish or bearish bias the S&P 500 has either just produced a top with the failure to hold over the 1400 level or the index is forming a bull-flag pattern before it springs higher again. The index did try to hold above the 1400 level but Thursday's news about weak data out of China helped push the index lower.
If the index continues to correct lower I would look for likely support in the 1380-1375 zone and near 1350 and its 50-dma.
2-hour chart of the S&P 500 index:
The NASDAQ composite actually managed another gain for the week. It's now up 11 out of the last 12 weeks. On a short-term basis the NASDAQ does appear to have just created a mini-bearish double top with the failed rallies under 3,090. You can also see on the two-hour chart below how the rally has stalled at the bottom of its prior channel.
If the NASDAQ does correct lower we can look for support near the 3,000 level and if that breaks then the 2,900 level.
2-Hour chart of the NASDAQ Composite index:
The small cap Russell 2000 index could be a good example of investor indecision. This past week saw a breakout past significant resistance but the $RUT immediately reversed lower the next day. Thursday saw a breakdown but there was no follow through on Friday. I suspect what we are seeing in this sideways churn is fund managers merely waiting for the end of the quarter.
Naturally a new close over key resistance in the 830-835 zone would be bullish.
2-hour chart of the Russell 2000 index
We continue to watch the Dow Jones Transportation average for clues. Unfortunately this past week the $TRAN failed at resistance near its 2012 highs. I cautioned readers a week ago that it could see a consolidation first before actually breaking out to new relative highs. We still need to keep an eye on crude oil prices. Oil was content to churn sideways in choppy trading in spite of the situation with Iran.
chart of the Transportation Average
We continue to watch shares of Apple Inc. (AAPL) as a key barometer of investor sentiment. There has been speculation about AAPL announcing a dividend for months. The company's cash hoard had risen to almost $100 billion. Shares got a pop last Monday when they announced a quarterly cash dividend of $2.65 a share. If that was not enough they also announced a $10 billion stock buyback program. Shares of AAPL slowly crept higher and almost hit $610 a share on Wednesday before paring its gains ahead of the weekend.
Is this a top in AAPL with its inability to hold gains above $600 a share? We won't know that until it's in the rear-view mirror but as you can see from the chart AAPL is extremely overbought and due for a correction lower.
chart of the Apple Inc. (AAPL)
It seems that investors have already forgotten about Greece. I barely heard anything regarding the country's debt deadlines last week. Hopefully Greece will remain out of the headlines for another several weeks. Investor worry is now turning toward Portugal and Spain with bond yields rising. Last week's disappointing PMI data for the Eurozone merely confirms that the region is going to struggle to stay out of recession. Areas like Greece and Spain are facing depression-level business activity and high unemployment. We could hear more about Greece depending on how their April elections turn out.
Looking ahead it's a another relatively quiet week for economic data. We'll get additional data on the U.S. housing market. There will be two reports on consumer confidence/sentiment. The latest estimate on Q4 GDP, which is expected to come in unchanged at +3.0%. The key events will be the Chicago Fed survey, Richmond Fed survey, and Kansas City Fed survey on business activity.
Looking beyond the end of March and the end of the first quarter will be the beginning of Q1 earnings season in less than three weeks.
- Monday, March 26 -
pending home sales
Chicago Fed report (CFNAI)
- Tuesday, March 27 -
Consumer Confidence for March
Case-Shiller 20-city home price index
Richmond Fed survey
- Wednesday, March 28 -
Durable goods orders
- Thursday, March 29 -
Weekly Initial Jobless Claims
Q4 GDP estimate
Kansas City Fed survey
- Friday, March 30 -
personal income and spending
Michigan Sentiment (final estimate for March)
April 6th, Nonfarm Payroll report for March
April 10th, Alcoa (AA) unofficially kicks on Q1 earnings
April 24th FOMC meeting
April - Greek election
The Week Ahead:
The last few days have seen commodities lead stocks lower on worries over a slowdown in China. That trend could continue although oil could be an exception. WTI crude oil futures ended the week at $106.75 a barrel. Brent crude oil ended the week at $127/bbl. You already know that the situation with Iran is heating up. Oil exports out of Iran are starting to decline due to intense sanctions by the U.N. Meanwhile Saudi Arabia says they will make up the difference by pumping extra oil to cover Iran's shortfall. Unfortunately I don't see how this is going to help with gas prices in the U.S.
We already have a temporary overabundance of oil in the central U.S. This country has actually started exporting oil (or oil equivalents) for the first time in years. Yet gas prices continue to climb. The average price of gas in the U.S. hit $3.89 a gallon on Friday. Several parts of the country are already paying more than $4 a gallon. This rising cost of fuel could end up having a major impact on our slowly improving economy. You've heard it a hundred times. Consumer spending accounts for almost 70% of the U.S. economy. Every dollar that gets poured into our gas tank is a dollar less for somewhere else. Seasonal trends usually mean gas prices rise as we near summer and Americans start driving even more (summer trips and vacations).
The situation with Iran could be one of the main stories affecting the market all summer long. Art Cashin is director of floor operations for UBS and Art recently shared his opinion that if war breaks out with Iran we could see the Dow Jones Industrials Average plummet more than 1,000 points on this news. Money would immediately begin flowing back into safe-haven plays like U.S. bonds (and probably gold too).
While we are on the subject of bullets flying there were rumors of a coup attempt in China this past week. All reports and Internet postings of unrest in China were quickly erased by the country's Internet censors. China is due for its once-a-decade realignment this year. This is the first time in 20 years that both China and the U.S. will see a major political event in the same year. This failed to have a big impact on U.S. stocks but could have added to the lack of enthusiasm to commit new capital.
Looking ahead at the last week of March I suspect we will either see stocks churn sideways or see a slow drift higher. Either will be a reflection of fund managers focused on the end of the first quarter. Most fund managers will fall into two camps. They are either fully invested and happy to sit tight and count down the remaining days of a very strong first quarter or they were underinvested and feel the need to window dress their portfolios and chase stocks higher. Does this mean stocks will sell-off in April? That is going to depend on Q1 earnings season. The average investor may not know this but estimates for Q1 earnings growth are pretty dismal. On the other hand Wall Street should be fully aware of Q1 earnings forecast. With expectations for a disappointing earnings season are we setting up for a bullish surprise that fuels the market higher? Or will we see investors sell the news instead? Seasonally April is usually a positive month for stocks but you know what follows April and that's the "sell in May" phenomenon.
The threat of high gasoline prices, a potential war with Iran, and a hotly contested U.S. presidential election, you could argue that "sell in May" may not be a bad idea, especially following such a strong first quarter. The wildcard here could be the April 24th FOMC meeting. The Fed's "Operation Twist" will be coming to an end soon. If the last two years is any guide then without any stimulus from the Fed stocks tend to sink. Will the Fed announce some sort of QE3? Normally the Fed does not like to be very active during an election year so they can appear to remain politically neutral. This April 24th meeting may be the last time they can act and still maintain appearance of neutrality.
What are long-term option investors to do? The market's trend is clearly higher but we definitely have some obstacles ahead of us. Of course bull markets tend to "climb the wall of worry". Readers may want to be quicker at taking profits, especially ahead of any company-specific earnings reports. You might want to re-adjust your stop loss placement as well. We will continue to add positions if we see opportunity but investors may want to start with small positions and slowly add to them as they progress. I anticipate a lot more volatility in stocks over the next couple of months.