Is the correction already over? Stocks continued to throw a "taper tantrum" Monday through Wednesday last week. Then better than expected economic data out of China and Europe helped spark an oversold bounce. After the Federal Reserve's summer retreat in Jackson Hole there was also a grown sense that maybe the Fed will postpone their QE taper and instead of starting in September it could be pushed back to later in the year or even January. That helped fuel gains for equities. The NASDAQ and the small cap Russell 2000 led the bounce with help from the transportation average (+1.6% for the week). Precious metals continued to climb and oil bounced with stocks late in the week. A three-hour trading outage at the NASDAQ on Thursday failed to dampen investor spirits.
Housing data was the biggest event on the economic calendar in the U.S. Existing home sales rose +6.5% in July to an annual pace of 5.39 million. This followed a downwardly revised 5.06 million pace in June. This is approaching a four-year high for existing home sales. The news wasn't so hot for new home sales, which plunged to 394,000 in July from 497,000 in June. The big drop in new home sales threw cold water on the QE taper crowd and gave renewed hope that the Fed might postpone the beginning of any reduction in QE. Wells Fargo said their housing opportunity index dropped from 73.7% to 69.3%. Rising mortgage rates were putting pressure on buyers. This was the first time this index has bee under 70% since 2008. The bad news kept coming with the weekly MBA mortgage application index, which dropped another -4.6% following last week's -4.7%. This is the 13th decline in the last fifteen weeks for the mortgage index.
We continue to see improving economic data out of Europe. Two weeks ago the Eurozone officially ended their recession with a positive GDP reading. This past week the Eurozone manufacturing PMI rose from 50.3 to 51.3. That was better than expected and numbers above 50.0 indicate growth and expansion. The improvement was driving by Germany's manufacturing PMI, which rose from 50.7 to 52.0. Germany also unveiled that their Q2 GDP growth estimate came in at +0.7%. The focus will remain on Germany through the end of September due to Germany's national elections. The current German Chancellor Merkel is facing grief over its stance on Greece. This past week there were new headlines that Greece would likely need a third bailout. Meanwhile France continues to struggle. Its manufacturing PMI was unchanged at 49.7. French officials also suggested that it could take ten years before the country reaches full employment again.
China helped fuel the market's bounce with a positive reading on the HSBC manufacturing PMI index, which came in at 50.1, up from 47.7. That was better than expected and numbers above 50.0 indicate growth. Nearby there were a number of headlines out of Japan. Japan said their trade deficit grew to 1.02 trillion yen and their all industries activity index fell -0.6%. There is a growing expectation that Japan will implement a new sales tax increase in spite of worries that it might encumber their stimulus efforts.
The S&P 500 index closed at 1642 on Wednesday. That's a -3.9% correction from its early August high. It almost deep enough to test technical support at the rising 100-dma. Traders stepped in buy stocks on Thursday and by Friday's closing bell the S&P 500 was up +0.4% for the week and back above its simple 50-dma.
If the bounce continues the next level of significant resistance is probably the 1680 level and then the 1700 level. If the bounce reverses we can look for support near 1640 and its 100-dma (currently 1635). If those levels fail then a drop to 1600 is likely.
chart of the S&P 500 index:
The NASDAQ was a major story on Thursday with a three-hour trading outage. Normally an event like that would weigh on investor sentiment and spark a "sell first, ask questions later" mood but that didn't seem to happen. The NASDAQ managed a +1.5% gain for the week. The top of its recent gap down near 3670 could be short-term resistance. If the NASDAQ can rise past that level then the 13-year highs near 3690 are the next level of resistance. If the bounce reverses then the 3600-3590 zone is short-term support.
chart of the NASDAQ Composite index:
The small caps started to bounce on Tuesday after the Russell 2000 broke down below its 50-dma the day before. The index managed a +1.3% gain for the week but the rally stalled near short-term resistance at the 1040 level. We can expect resistance at 1040 and 1060. If the index reverses I would look for support in the 1010-1000 area.
The 100-dma, currently near 990, could also be support.
chart of the Russell 2000 index
Economic Data & Event Calendar
The pace of economic data in the U.S. picks up a bit this week. We'll see both the consumer confidence and consumer sentiment numbers. The big report for the week is probably the next estimate on U.S. Q2 GDP growth. The first Q2 estimate was +1.67%.
The market will be closed on Monday, September 2nd. The next jobs report is due Friday, September 6th. Congress returns to Washington from their August recess on September 9th.
Economic and Event Calendar
- Monday, August 26 -
Durable Goods Orders
German import/export data
- Tuesday, August 27 -
Case-Shiller 20-city home price index
- Wednesday, August 28 -
pending home sales
Japan retail sales data
- Thursday, August 29 -
Weekly Initial Jobless Claims
Q2 GDP estimate
Japan inflation data
- Friday, August 30 -
personal income and personal spending data
University of Michigan consumer sentiment survey
Additional Events to be aware of:
August 31st - Chinese PMI data
September 2nd, - U.S. market closed for Labor Day
September - U.S. debt ceiling deadline
September - German elections
The Week Ahead:
You've probably heard it a hundred times already but September is historically the worst month of the year for U.S. equities. Seasonal trends are not guarantees. There are exceptions but the patterns happen often enough that market participants take notice. This September the odds are against the bulls. Some are still expecting it to be "Septaper" with the possibility that the Fed Chairman Bernanke might announce a reduction in their QE program. As I mentioned last week there is a growing camp of analysts and traders who suspect that the Fed will not taper in September but it remains a possibility. Another major event that could impact the markets will be the epic
battle in Washington over the budget and debt ceiling. Odds of a rise in volatility seem almost a sure thing for September.
On a side note there was an interesting article by Investors Business Daily this past week that reinforced why the market is worried about the Federal Reserve moving too fast. According to the IBD every single recession since World War II has been preceded by the Fed raising interest rates. We should make the distinction that there is a significant difference between the Fed raising rates and the Fed reducing their QE program. They're going to reduce QE first and it could be another year or more before the Fed starts raising rates.
I am concerned about the GDP estimate due out on Thursday. I'm worried it's going to come in less than expected. The bigger problem could be Q3 GDP growth, which could be abysmal.
In the last two weeks we've heard from several major retailers who all lowered their guidance due to softer sales numbers. We're also seeing a drop in consumer spending at restaurants too. If the consumer is cutting back on their discretionary spending it could indicate the economy is slowing faster than expected. If that's true then everyone expected a big rebound in the second half of 2013 are going to be terribly disappointed.
Another interesting tidbit was the fact that equity funds saw their largest outflows in five years last week, according to Bank of America's Merrill Lynch. Investors seem to be pulling their money out of everything. Bonds hit new lows last week. Stocks were down until the Thursday-Friday bounce. Emerging markets are getting crushed. Gold and silver seemed to be the exception with decent gains for the week.
We have two weeks before the fight in Washington D.C. over the U.S. budget and the U.S. debt ceiling begins. We have just over three weeks before the mid September FOMC meeting. It doesn't make sense to see investors buying stocks ahead of these potential market moving events but then market often doesn't make sense. It's quite possible that the recent bounce in stocks is just that, only a bounce, before the market continues lower. I would be cautious on launching new positions between now and the end of September.