The stock market's post-election sell-off continues with fears running high over Washington's inability to solve the fiscal cliff gridlock. Meanwhile Europe has officially fallen back into recession again. Geopolitical tensions are rising with war is brewing in the Middle East. Israel is marshalling ground troops in response to Hamas firing hundreds of rockets into Israel in the past week. Yet in spite of all the negative headlines the sellers might be exhausted. The stock market's intraday bounce on Friday could be a short-term bottom.
The stock market's focus remains the fast approaching fiscal cliff on January 1st, 2013. Both democrat and republican leaders met on Friday and in a post-meeting statement to the press they tried to offer a positive spin that the two parties will find some mutual ground to come together and solve this before it's too late. No one offer any real details nor did they agree on a time frame for when this deal would be reached. Yet just the promise that something would be done seemed enough to spark a little short covering on Friday. It is more likely that after a multi-week decline it was time for bears to do a little profit taking ahead of the weekend.
In economic news the headlines were mixed. The number of applications for new mortgages and mortgage refinancings rose +11% and +13.1%, respectively. These are four-week highs for mortgage applications and suggest some strength in the real estate market even though this is normally a slower season for home sales. The PPI for October dropped -0.2% which was better than expected. The New York Empire State manufacturing survey for November came in at -5.2, which was an improvement from last month's -6.2 but still in negative territory. The Philly Fed survey plunged to -10.7 when economists had been expecting an improvement to 0.0 from October's -1.9. Weekly initial jobless claims also surged well past estimates. Yet the government is blaming Hurricane Sandy for the declines in the New York fed, Philly Fed, and jobless claims.
Headlines from Europe continue to plague investor confidence.
The Eurozone has officially fallen into its second recession since 2009. The latest data showed the region's GDP fell -0.1% in the third quarter. That followed the -0.2% decline in the second quarter. France and Germany are the Eurozone's two largest and some of their strongest economies yet both countries only managed a +0.2% growth rate in the third quarter and together they were unable to keep the Eurozone region in positive territory. That's not too surprising. They would be hard pressed to keep the 17-nation Eurozone afloat. Much of the southern region is sinking with Spain and Italy slowing and Greece crashing. There have been warning signs that Germany's economy was finally starting to get bogged down in the mess with exports falling and businesses cutting back and confidence numbers sliding.
Last week I cautioned readers to look for the S&P 500 to dip toward the 1350 level as potential support. By Thursday the index was bouncing along the 1348 level. It looked like it might bounce from there but instead the index spiked down to 1343 on Friday morning and then reversed higher.
As you can see from the chart below the S&P 500 has completed a 61.8% Fibonacci retracement of the June-September rally. It's also see a -9% pullback from its Summer highs. Is the correction finally over? That I can't say but it does look like the S&P 500 index is poised to bounce. Friday definitely looks like a one-day bullish reversal pattern. I would not be surprised to see a bounce back toward the 1380 level and possibly higher.
My worry is that without a solution to the fiscal cliff issue is that this bounce will fail and eventually produce a new lower high.
chart of the S&P 500 index:
The NASDAQ continues to underperform. The NASDAQ composite gave up -1.7% for the week and posted its sixth weekly decline in a row. It's down seven out of the last eight weeks. Friday's low was 2810 making it a -12% correction from the September highs.
Friday's intraday bounce looks like a bullish reversal but we'll have to see if there is any follow through. The index is definitely oversold at these levels. We could easily see the NASDAQ rebound back into the 2900-2950 zone but I suspect the 2950-3000 area might be tough resistance.
I am not claiming we are in a bear market but I would expect the bounce to act like a bear-market rally, which will probably short and fast only to fail at resistance.
Should the 2800 level fail then the next likely support area is the 2750-2725 zone.
chart of the NASDAQ Composite index:
The small cap Russell 2000 index was one of the worst performers of the week with a -2.3% drop. Coincidentally the $RUT's low on Friday also marked a -12% correction from its September high. Technically Friday's intraday bounce has created a bullish engulfing candlestick bullish reversal pattern. It is also a bounce from trend line support I've had on my weekly chart for months. If we're lucky we will see the $RUT bounce back toward broken support and likely resistance at the 800 level, maybe higher, but not likely to rally past 820.
Daily chart of the Russell 2000 index
Weekly chart of the Russell 2000 index
The fiscal cliff remains the market's main worry but after government leaders met in Washington and promised to cooperate on Friday we might see concerns postponed for a few days. Thankfully investors and consumers are likely to be distracted by the upcoming Thanksgiving holiday and "black Friday" sales.
There is not much on the calendar this week. If I had to pick one report to watch it might be the Chinese PMI data on Wednesday. Trading volumes are going to dwindle lower and lower each day. The markets are closed on Thursday and will only be open half a day on Friday.
Economic and Event Calendar
- Monday, November 19 -
existing home sales
- Tuesday, November 20 -
- Wednesday, November 21 -
Weekly Initial Jobless Claims
University of Michigan Consumer Sentiment Survey
Chinese manufacturing PMI
- Thursday, November 22 -
U.S. markets closed for Thanksgiving holiday
Eurozone consumer confidence
- Friday, November 23 -
U.S. markets close early on Friday
German GDP report
Additional Events to be aware of:
Dec. 12th - FOMC meeting
The Week Ahead:
Looking ahead the Thanksgiving week is traditionally a bullish one for stocks but that's not a guarantee. Although this week timing will work in the bulls' favor. Stocks are oversold and poised to bounce so history will likely be repeated with an up market. I want to warn you again that without a solution for the fiscal cliff that any market bounce is probably just another opportunity for bearish trades. While I expect stocks to move higher the next few days, when market participants return to work on Monday, Nov. 26th, they could be looking to sell the rally. The exception might be retail stocks that could see a rally if data from "black Friday" and the weekend suggest consumers are opening their wallets again.
I am concerned that fighting in the Middle East could negatively impact investor sentiment. In the last several days Hamas has launched hundreds and hundreds of rockets into Israel, mostly at civilian targets. Fortunately, some of Israel's major cities have intercept weapon systems that can shoot down incoming rockets. That has not stopped Israel from marshalling 75,000 ground forces for action. Currently Hamas is the legal ruling political party for Palestine even though many consider them a terrorist organization who refuses to recognize Israel's right to exist. Personally, I don't think there will ever be peace in the Middle East but from an investor perspective, the idea of massing troops and retaliatory strikes back and forth across the borders of Israel and Palestine are never a good sign. If another neighboring country decides to get involved it could turn ugly real quick. However, as long as this remains an Israeli-Palestinian conflict the impact on the U.S. stock market will likely be mild.
Let's not forget that some of the issues we still face between now and the end of the year are gridlock in Washington over the fiscal cliff, investor temptation to sell stocks now to avoid higher taxes in 2013, and another fight in Washington over the U.S. debt ceiling again. Plus we have Europe slowing down. China seems to be slowing down. Spain could be on the verge of asking for a bailout. Syria remains at civil war. Iran is only months away from having enough enriched uranium for a nuclear warhead. Odds are that the Iran issue will come to the forefront again in the first half of 2013 and that will definitely have an effect on crude oil prices.
On that happy note hug your friends and family and enjoy your Thanksgiving Holiday. We have much to be thankful for!