The major averages fell in September and squeezed out a nominal gain for Q3. September was only the third monthly decline for the S&P 500 (SPX) in 2014. The bigger concern from where we sit is something virtually no-one is talking about- What will happen when QE 3 Ends? Remember the S&P 500 (SPX) soared when QE has been in effect and fell -17% when QE 1 ended and fell -22% when QE 2 ended. It will be very interesting to see how the market reacts when QE 3 officially ends later this month. Since September 15, a slew of leading stocks, and the major averages, have been acting somewhat sloppy (erratic price swings). The small cap Russell 2000 (RUT) remains the weakest index and continues to woefully under-perform its peers which remains a concern. The last time all this happened was in March/April and that preceded the deepest pullback of the year (-6% decline in the S&P 500). So far this pullback is -4.61% under two weeks which is just about the normal depth of all the pullbacks this year (see chart below). It is encouraging to see the bulls show up on Thursday and send stocks higher in the latter half of the week.
Monday-Wed’s Action: Stocks End Month & Quarter On A Weak Note
Stocks opened sharply lower on Monday after protests broke out in Hong Kong. It was encouraging see buyers step up and send stocks higher by the close, helping the major averages close near their respective highs for the day. Economic data failed to impress. Pending home sales slid 1% in August and a separate report showed personal income in the U.S. rose 0.3%, matching estimates. Shares of Facebook (FB) rallied after news spread that banks may request access to their clients’ accounts on the social media site to determine whether or not the person has a stable friend network to determine their credit risk.
Stocks were relatively quiet on Tuesday as the month and quarter came to an end. After all was said and done, stocks barely edged out a small gain in Q3 and fell in September. A slew of commodities were hit hard in the month and quarter as the US dollar soared. Remember commodity prices traditionally are inversely related to the US dollar because a higher dollar makes it more expensive to buy commodities.
Stocks fell on Wednesday as sellers returned on the first day of the fourth quarter and economic data remained lackluster at best. ADP, the country’s largest private payrolls company, said U.S. employers added 213k new jobs last month, beating estimates for 200k. Manufacturing data in the U.S. also missed estimates. Markit’s PMI mfg index slid to 57.5, missing estimates for 58. The ISM manufacturing index slid to 56.6, missing estimates for a reading of 58. Two biotechs (SRPT & TKMR) that are working on a cure for Ebola rose after the first case of Ebola was diagnosed in the U.S. The CDC confirmed late Tuesday that a man from Liberia had the virus and was being treated in a hospital in Dallas.
Thurs & Fri’s Action: Sellers Getting Exhausted
Stocks opened lower but closed near their highs on Thursday which was a welcomed sign. It signaled that sellers may be exhausted in the short term. On Thursday, the ECB concluded their latest meeting. Mario Draghi (head of the ECB) did not take additional measures which disappointed some investors. Instead he outlined details of his asset-backed securities (ABS) purchase program (their version of QE). The US dollar fell as it pulled back from deeply overbought levels. Overnight, former Japanese Finance Minister Fuji said the Bank of Japan may be forced to intervene directly due to the recent decline in the Yen in the market to prevent it from falling even further. This is one of the strongest comments from a major central bank regarding the recent and very strong 12-week rally in the greenback. Stocks rallied on Friday after the U.S. government said employers added 248k new jobs last month and the unemployment rate slid to 5.9%, both figures easily beating estimates. The unemployment rate slid to the lowest level since mid-2008.
Market Outlook: Market Finally Pulls Back
The two best words to describe this market are “melt up.” Keep in mind that the bull market is aging (turned 5 in March 2014 and the last two major bull markets ended shortly after their 5th anniversary; 1994-March 2000 & Oct 2002-Oct 2007) but until we see signs of sustained distribution (heavy selling) the market deserves the bullish benefit of the doubt. Furthermore, the S&P 500 has not experienced a 10% correction since 2012 which is longer than most historical comparisons and illustrates how strong this bull market is. As always, keep your losses small and never argue with the tape.