Stocks fell in the last full week before the month and quarter officially end (Tuesday’s close). Barring some unforeseen rally into Tuesday’s close, the benchmark S&P 500 (SPX) fell in September but ended higher for the quarter. If stocks close lower for the month, this will be the third monthly decline for the SPX this year. It was encouraging to see the bulls defend the SPX’s 50 DMA line on Friday. 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 next month. Leading stocks are also acting sloppy and the action in the market over the past few days is starting to get a little sloppy (erratic price swings). The small cap Russell 2000 (RUT) continues to woefully under-perform its peers which remains a concern. It will be interesting to see how this plays out. 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).
Monday-Wed’s Action: Struggle For Direction
Stocks fell on Monday after weaker than expected data was announced in China and the U.S. Overnight, China signaled it would not boost stimulus measures to help its economy. In the U.S., the National Association of Realtors said previously owned homes fell by -1.8%. William Dudley, Head of the NY Fed spoke at the Bloomberg Markets Most Influential Summit and said the Fed’s monetary policy remains data dependent- which means that the Fed will step up and help if either Main St or Wall Street gets in trouble. Meanwhile, the small cap Russell 2000 index, which has been lagging the larger indexes for most of this year, and experienced a death cross (50 DMA line undercuts the 200 DMA line).
Thurs & Fri’s Action: Sellers Regain Control
Stocks plunged on Thursday as investors were worried about global growth. Fears spread regarding the situation between Ukraine and Russia. Reuters reported the draft law, submitted to Russia’s parliament on Wednesday by a pro-Kremlin deputy, would also allow state compensation for those whose assets were taken in foreign jurisdictions. The proposed measure comes after Italy froze luxury properties owned by a longtime friend of President Vladimir Putin, Bloomberg reported. In the U.S., economic reports were mixed. Durable goods fell by -18.2% in August, missing estimates for an 18% decline. Meanwhile, weekly jobless claims rose by 12k, to a seasonally adjusted 293k last week. Shares of Apple (AAPL) fell after news spread that their new phones were able to bend (and break) easily. The new term is called #bendgate. Apple responded and said there have only been 9 complaints (so far) of the new iPhone bending. Stocks rallied on Friday after Q3 GDP rose 4.6%, topping the prior reading for 4.2%. A separate report showed consumer confidence rose in September.
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.