Friday, November 13th, was a paradigm shift for a lot of people. The terrorist attacks in Paris has changed the security situation in Europe. It has changed the conversation on the Syrian refugee crisis. It has also changed the tone of the U.S. presidential race. Oddly enough the stock market seems unaffected. There was no big knee-jerk reaction lower on Monday morning. Instead the U.S. market started to bounce and continued to bounce throughout the week. In fact, after a painful -3.6% plunge two weeks ago, the S&P 500 delivered its best weekly gain of the year with a +3.27% bounce last week.
Markets were resilient. Japan announced their economy has fallen back into recession. The Baltic Dry goods index fell to new lows. German authorities canceled a soccer match over a credible bomb threat. Even now the city of Brussels is essentially under martial law as security forces hunt terror suspects over worries of a Paris-style attack in their city. Yet stocks continued to climb.
It was a widespread rally. All of the major U.S. indices posted strong gains. Transports rallied. Semiconductor stocks, banking stocks, and biotech stocks all rallied +3% or more. The worst performers were oil stocks (+1.4%) and oil service stocks (-0.7%). That's because crude oil flirted with a breakdown below $40.00 a barrel all week.
There was a lot of economic data to digest.
The consumer price index (CPI) for October was in-line with estimates. The headline inflation number and the core-CPI both rose +0.2%. The U.S. industrial production number fell -0.2% in October. This was slightly below estimates.
The NAHB Housing Market Index, which is a sentiment survey among homebuilders, saw its October reading revised up from 64 to 65. Yet the November reading fell to 62, below expectations.
Meanwhile housing starts for October plunged -11% to a seasonally adjusted rate of 1.06 million units. That's down from 1.19 million pace in September and below the 1.16 million estimate.
There were three regional fed surveys. The Kansas Fed manufacturing survey bounced from -1 in October to +1 in November. This is the first positive reading since January this year. The New York Empire State manufacturing Index came in below expectations at -10.74. This was the fourth month in a row below zero. The Philadelphia Fed survey improved from -4.5 in October to +1.9 in November. It was the first reading in positive territory since July.
The other big news for the week was the FOMC minutes from the last meeting. The market chose to interpret the minutes as further proof that the Fed will raise rates in December. However, the minutes did note that only some committee members favor a hike in December, not all members.
Overseas Economic Data
The G-20 summit last weekend did not produce any market-moving headlines. Meanwhile Japan started the week with disappointing numbers. The world's third largest economy announced that their Q3 GDP fell -0.8%. That was worse than the -0.2% expected by economists. It also marks the second quarterly decline in a row, which puts the Japanese economy technically in another recession. This is Japan's second recession since late 2012. This news fueled speculation that Japan's central bank might announce more stimulus. Yet when the Bank of Japan met this past week they made no changes and left their main interest rate unchanged at 0.10% and left their QE program unchanged.
Looking toward Europe, Germany said their wholesale inflation gauge, the PPI, fell -0.4% in October. That was worse than expected. It's down -2.3% year over year. Germany also sold more than 4.3 billion euros worth of two-year bonds with a negative yield of -0.38%. Yes, you read that correctly. These bonds have a negative yield. You would be paying the German government 0.38% to hold your money for two years.
European Central Bank President Mario Draghi made headlines again. He spoke at the European Banking Congress on Friday. He essentially reiterated his "do whatever it takes" slogan to raise inflation in Europe and reiterated that the ECB is ready to move (likely at their December meeting). Here's a brief excerpt from his speech, "At the December Governing Council meeting we will thoroughly assess the strength and persistence of the factors that are slowing the return of inflation towards 2 percent. If we conclude that the balance of risks to our medium-term price stability objective is skewed to the downside, we will act by using all the instruments available within our mandate... We consider the asset purchase program to be a powerful and flexible instrument, as it can be adjusted in terms of size, composition or duration to achieve a more expansionary stance...if we decide that the current trajectory of our policy is not sufficient to achieve our objective, we will do what we must to raise inflation as quickly as possible."
The S&P 500 index bounced near its 38.2% Fibonacci retracement level (on the daily chart). This also coincided with round-number resistance near 2,020 on Monday. Stocks soared with the big cap index gaining +3.2% for the week. This lifted the index back into positive territory for 2015 (now up +1.5%).
The S&P 500 is arguably short-term overbought now but that doesn't mean the rally is over. After such a big move it's tough to pinpoint where the index might see support. I would look for short-term support in the 2,050-2,060 area. The 2,110-2,120 zone is definitely overhead resistance.
Daily chart of the S&P 500 index:
The NASDAQ composite dipped toward round-number support at 4,900 on Monday and rebounded, producing a bullish engulfing candlestick reversal pattern. This index surged almost +4% from its low on Monday to Friday's closing bell. Year to date the NASDAQ is now up +7.8%.
On a short-term basis I'd watch the 5,000 area for potential support. Meanwhile the 5,165 area and the all-time high from July in the 5,230 region are both overhead resistance levels.
chart of the NASDAQ Composite index:
The small cap Russell 2000 index underperformed its big cap rivals. The index only gained +2.5% last week. That followed a -4.4% plunge the prior week. On a positive note the $RUT did find support near 1,140 last Monday. Plus it's back above resistance at the 1,170 level. Now the $RUT faces additional near 1,180 and the 1,200 levels. Year to date the $RUT is still down -2.4%.
chart of the Russell 2000 index
Economic Data & Event Calendar
The U.S. markets are closed on Thursday as Americans celebrate their Thanksgiving holiday. Markets also close early on Friday (1:00 pm). That means most of the economic events are all lumped together in the first three days of the week.
The second estimate on U.S. Q3 GDP growth is expected to rise from +1.5% to +1.9%. Anything too hot or too cold could move the market. Consumer sentiment is expected to bounce after falling to three-month lows in October.
Meanwhile there will probably more headlines regarding Europe and the terror threat it faces. French President Francois Hollande is scheduled to meet with U.S. President Obama on Tuesday and then later meets with Russian President Vladimir Putin on Thursday. Both meetings are focused on French and Europe's response to the terror threat and how they might cooperate with the U.S. and Russia.
- Monday, November 23 -
Existing Home Sales
- Tuesday, November 24 -
Germany's Ifo business confidence index
U.S. Q3 GDP estimate (2nd estimate)
Case-Shiller 20-city home price index
- Wednesday, November 25 -
Personal Income & Spending (from October)
Durable Goods Orders
University of Michigan Consumer Sentiment (final reading for Nov)
New Home Sales
- Thursday, November 26 -
Thanksgiving holiday (markets closed)
- Friday, November 27 -
Black Friday , stock market closes early @ 1:00 pm
Additional dates to be aware of:
Dec. 4th - Nonfarm payrolls (jobs) report
Dec. 4th - OPEC meeting
Dec. 16th - FOMC meeting, new forecast
Dec. 16th - Fed Chairman Yellen's press conference
Dec. 24th - Christmas Eve (market closes early)
Dec. 25th - Christmas (market closed)
Stocks bounced last week but the prior week equities were falling on renewed concerns about global growth slowing down, especially outside the U.S. This past week saw the Baltic Dry Goods Index ($BDI) plunge to new lows on Friday. This index tracks the price to ship dry goods from one port to another. It does not track the price of commodities directly but the movement of commodities and goods. Right now there is no demand. The $BDI rate fell to a record low. Shipping companies are slashing prices trying to get business. This does not bode well for global economic growth.
Chart of the Baltic Dry Goods Index
Seasonally this time of year the market has a bullish bias. November 1st kicked off the best six months of the year for stocks.
Individual weeks have historical trends too.
Thanksgiving week tends to have a slightly bullish bias. However, volume starts to wane and more and more investors and traders pack up and leave town for the holiday.
December also has a strong bullish bias. The S&P 500's best month of the year tends to be December. The same goes for the small cap Russell 2000. According to the research team at the Stock Trader's Almanac, pre-election year Decembers normally see even stronger gains than the historical average. That doesn't mean stocks can't go down in December. The first half of December is normally weaker than the second half thanks to tax-loss selling before the year end and any profit taking from a strong November.
The term "Black Friday" has only been around since the 1980s. Long before that retailers were focused on the holiday shopping season. Many retailers operated at a loss from January through November. The surge of consumer spending for the holidays would push their business into "the black" for the year. This is back when accounting practices used red ink for losses and black ink for profits - at least that's the theory.
The National Retail Federation notes that U.S. consumers spent almost $51 billion last year in the store and online during the Friday-Saturday-Sunday shopping fest that follows Thanksgiving. That's almost $381 per person. This year there have been a number of sour forecasts for consumer spending this holiday season. There will be a big focus on how well retailers (online and off line) do this year.
Wishing everyone a wonderful Thanksgiving holiday.
We have much to be thankful for.
P.S. The last few years there has been some sensationalism about which stores are or aren't open on Thanksgiving.
If you are curious here is a partial list of stores that are open -
Which Stores Are Open On Thanksgiving (The Consumerist)