It was a rough week for stocks. The markets were sinking under a barrage of economic data, earnings warnings, and renewed taper fears. Stocks retreated lower while precious metals soared and the bond market crashed to new two-year lows. The yield on the 10-year note hit 2.8%, its highest level since August 2011. Crude oil rose +1.3%. Gold rallied +4.7% while silver prices surged +13.1% for the week. Warnings and bearish guidance from major companies like Wal-Mart (WMT) and Cisco Systems (CSCO) weighed heavily on investor sentiment. After CSCO reported earnings this past week management said they were cutting 4,000 jobs and lowering their revenue guidance. Meanwhile an uptick in inflation and falling jobless claims fanned the flames for fears that the Federal Reserve will begin tapering their QE program in September.
It was a no-win situation for the stock market as it digested a busy week of economic data. Bad economic news was bad news while good economic news was also seen as bad news since it means the Fed should be closer to tapering. There were two regional Fed surveys last week. The Philly Fed survey plunged from 19.8 in July to 9.3 in August. The New York Empire State manufacturing survey declined from 9.5 to 8.2 with the new orders component falling toward the flat line. U.S. industrial production for July came in flat after a +0.2% gain in June. Economists were expecting July to rise +0.4%.
Inflation at the wholesale level (the PPI report) was flat but the core PPI was up +0.1%. Inflation at the consumer level (the CPI) rose +2.0%. U.S. retail sales in July rose +0.2% but this was down from June's upwardly revised +0.6% reading.
Weekly initial jobless claims slipped to their lowest level since October 2007 with a reading of 320,000.
There is an interesting divergence in economic data for the housing industry. Housing permits for single-family home dropped -1.9% while multi-family permits rose +12.6%. Meanwhile housing starts rose +5.9% to an annual pace of 896,000 in July but that was below analysts estimates for 925,000. Housing starts for single family homes actually fell -13,000 to a 591,000 pace, which is the slowest reading since November 2012.
The MBA mortgage application index plunged another -4.4% last week. This was the 13th decline out of the last 14 weeks and marked a new two-year low. Falling mortgage applications should mean falling sales. Yet homebuilder confidence continues to rise. The latest NAHB homebuilder sentiment survey hit 59, which is an eight-year high. Economists were expecting a drop from 56 to 55. Readings above 50 are considered healthy. It is worth noting that there has been a dramatic rise in home sales where the buyer is actually paying cash for the property instead of financing it with a mortgage.
One of the biggest surprises last week was the latest University of Michigan consumer sentiment survey. Last month the consumer sentiment survey hit a six-year high at 85.1 in July. Economists were expecting a small uptick to 85.5 but the August reading actually reversed dropped to 80.0. That was the first "miss" in 2013 and one of the biggest drops on record. Both the current conditions component and the future conditions component of the index fell to four-month lows. I have mentioned before how there appeared to be a disconnect between consumer sentiment and actual consumer spending and that was very apparent in the retail sector this past week.
It was a very bad week for retailers. Macy's (M), Kohl's (KSS), Jos A. Banks (JOSB), Nordstrom (JWN), and Walmart (WMT) all delivered bad news and lowered their guidance. Walmart is the world's largest retailer. The company reported earnings a few days ago and missed analysts estimates on both the top and bottom line. WMT's same-store sales fell -0.3% compared to estimates for +0.7% gain. WMT then lowered their sales forecast from 5-6% down to 2-3% for 2013 on top of lowering their earnings per share guidance. In a recent interview WMT's chief financial officer said that consumers were "reluctant" to spend on discretionary items. Investors might have been able to ignore one or two retailers lowering their guidance but when several major players are all adjusting their forecasts lower it becomes an alarming trend.
This parade of disappointing guidance from the retail sector actually might be a key factor in the Federal Reserve not tapering in September. For months we've heard the Fed talk about a stronger second half growth story. Yet according to these retailers the second half is looking a lot weaker. When you consider that consumer spending accounts for almost 70% of the U.S. economy it does not paint a very strong picture of growth.
Believe it or not but we actually got some good news out of Europe. The Eurozone just ended its longest recession in the history of the single currency. After six quarters of contraction the Eurozone GDP grew +0.3% in the second quarter of 2013. The move was fueled by +0.5% GDP growth in France and +0.7% growth in Germany. Investors may want to keep their excitement in check. After a Q1 GDP decline of -0.3% the Eurozone is currently sitting at +0% growth for the year. There is always the chance that the Q2 number could be revised lower. Several countries remain in recession and Eurozone unemployment is still at a record high of 12.1%.
While we're on the subject of GDP growth both Japan and China were making headlines. Japan's Q2 GDP came in at +0.6%. That was below Q1's +0.9% and below estimates for Q2 growth of +0.9% but it is still positive growth. Meanwhile China's GDP growth is likely a lot less than the official number of +7.5%. It has long been suspected that the Communist Chinese government was not telling the truth when it came to their economic numbers.
A new study is suggesting that China could be exaggerating the size of its economy by $1 trillion. By analyzing inflation data over the last several years there appeared to be a pattern of "willfully fraudulent" manipulation with "significant and systematic irregularities". In summary it looks like the Chinese government has inflated their GDP growth numbers by about +10%. Currently instead of +7.5% growth the real number today is closer to +6%.
The big cap S&P 500 index lost -2.1% for the week. I warned readers last weekend that the levels to watch were 1685-1680 and the 1650 level near its 50-dma. Thursday's market sell-off pushed the S&P 500 below the 1680 level. The index ended the week sitting on support near 1650 and its 50-dma. Over the last two weeks the S&P 500 has produced a -3% correction.
If this profit taking continues then the next likely support levels are the 100-dma near 1630 and the 1600 level. Coincidentally the 100-dma near 1630 also lines up with a 50% retracement of the S&P 500's rally from its June lows. A 61.8% Fibonacci retracement would be a drop toward 1617.
Should the market decide to bounce then broken support near 1680 will become new overhead resistance.
chart of the S&P 500 index:
90-minute chart of the S&P 500 index:
The NASDAQ composite was holding up relatively well until the plunge on Thursday. This index posted a -1.5% decline for the week and closed on Friday sitting on round-number, psychological support at the 3600 level. If the correction lower continues it is possible the NASDAQ finds support near 3575 but I suspect odds are better that we'll see it drop toward 3550 and its rising 50-dma. If the selling accelerates then we could see the NASDAQ testing its 100-dma (near the dashed line on the chart) within the next few weeks.
A -5% correction from the recent highs would produce a pullback toward the 3500 level.
chart of the NASDAQ Composite index:
The small cap Russell 2000 index has also begun to correct lower with a -2.3% decline for the week. I have been warning investors that a breakdown below support near 1040 will probably lead to a drop towards 1020 and the 1,000 level. The $RUT might be able to bounce near 1020 thanks to its rising 50-dma but broken support at 1040 should be new resistance. Odds are pretty good that over the next two to four weeks we could see the $RUT test the 1000 level or even its simple 100-dma.
chart of the Russell 2000 index
Economic Data & Event Calendar
We have a relatively quiet week for economic news and events. The FOMC minutes is probably the biggest report. The annual Federal Reserve summit held in Jackson Hole, Wyoming will keep the market's attention focused on clues about when the Fed might begin to taper its $85 billion a month QE program.
Economic and Event Calendar
- Monday, August 19 -
- Tuesday, August 20 -
- Wednesday, August 21 -
MBA mortgage application index
Existing home sales data
China HSBC flash manufacturing PMI
- Thursday, August 22 -
Weekly Initial Jobless Claims
Eurozone manufacturing PMI
Federal Reserve Jackson Hole, WY conference starts
Kansas Fed manufacturing survey
- Friday, August 23 -
New home sales data
Additional Events to be aware of:
August 24th - G-20 meetings
September 2nd, - U.S. market closed for Labor Day
September - U.S. debt ceiling deadline
September - German elections
The Week Ahead:
Looking ahead I fear the market's focus will remain fixated on if and when the Federal Reserve will begin to taper their QE program. More and more analysts seem to be backing away from the Fed actually starting to taper in September. Many puts the odds at 50/50 or less. Yet PIMCO's Bill Gross said he still puts the odds at 80% the Fed will taper in September. The majority of pundits speculating on the taper do expect the Fed to begin by yearend.
The recent outbreak of retail companies all downgrading their 2013 guidance due to lowered second half sales estimates could be a factor in the Fed delaying their taper. Yet the steady drop off in weekly jobless claims would be a factor in favor of the Fed tapering early. It does seem a bit odd that so many on Wall Street do expect the Fed to begin tapering when multiple Fed governors have said that they want to see more data before they make that decision. The suggestion has been that the Fed wants to see multiple months worth of improving data before they cut back on their QE program. As one analysts suggested, the Fed has spent $2 trillion trying to stimulate the U.S. economy. Why would they want to undo all their work by ending the program too early?
In the end it doesn't really matter if you believe the Fed will taper in September or not. What matters for next week is that the market will remain focused on the topic for the foreseeable future.
If worries about the taper were not enough to cool off the stock market's summer rally we also have some major events in September. The debt ceiling debate will be front and center when congress returns from their August recess. Some congressman are willing to threaten a federal government shutdown in an attempt to leverage stronger budget cuts and to negotiate the U.S. debt ceiling issue. The negative headlines this political battle will generate are likely to sour investor sentiment toward the market.
September will also bring the next FOMC meeting, which is scheduled for September 17th. Plus, the global markets will also react to the German national elections set for September 22nd. Angela Merkel, the current German chancellor, is the favorite to win the upcoming vote. Any upset in Germany could ripple through Europe and generate market volatility.
We also need to keep an eye on violence in the middle east. The situation in Egypt is deteriorating.
This past week has seen hundreds killed as police and the army clash with pro-Morsi, pro-Muslim Brotherhood protestors. The official number is upwards of 800 killed but it could be worse since officials only count bodies in the morgue. The violence has intensified as the interim government tries to stop Muslim Brotherhood supporters who have been attacking government buildings, police stations, foreign journalists, Christians and Christian churches. There is a growing fear that Egypt's conflict could turn into a full fledge civil war. This feels a lot like Syria when the fighting began and worries were Syria would slip into civil war, which it has. The difference is that Syria had a population of about 20 million people while Egypt's population is about 85 million. Rising violence will continue to keep oil prices elevated, which is an unseen tax on the consumer.
On a short-term basis the market's trend is down. I wouldn't be surprised to see a little oversold bounce but I do expect that we'll see new relative lows before August is over. September could be very volatile. Investors may want to take a step back and just wait to see where the market is a month from now before considering new long-term LEAPS positions.