STOCK MARKET COMMENTARY:
FRIDAY, October 04, 2013
The market fell last week but closed in the upper half of its range after the US government shutdown for the first time since 1996! The S&P 500 is fighting to stay above its respective 50 dma line but the DJIA broke below it. The Nasdaq Composite and the Small and Mid cap indices continue to outperform as they remain perched near their 2013 highs. So far this appears to be just another shallow pullback in size (% decline) and scope (weeks, not months). The primary catalyst behind this 4.5 year bull market remains easy money from global central banks. We now know that the easy money is here to stay (for now). Eventually the music will end, but as a market practitioner, our only job is to align ourselves with what is actually happening, not what someone thinks will happen. That said, weakness should be bought until intermediate and longer-term technical levels are broken. The market remains very news-driven and the latest headlines remain the always exciting drama in D.C. It is unfortunate that the US economy has to suffer while both sides of the aisle continue to embarrass themselves…again.
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MONDAY-WEDNESDAY’S ACTION: Gov’t Shutsdown
Stocks fell on Monday after it became clear that the government would be forced to shutdown at midnight. As expected, the geniuses in DC failed to reach a deal and the government shut down for first time since 1996. For the month, the Dow rallied 2.16 percent, the S&P 500 jumped 2.97 percent, and the Nasdaq soared 5.06 percent. For the third quarter, the Dow rose 1.48 percent, the S&P rallied 4.69 percent, and the Nasdaq vaulted 10.82 percent. Economic data was mixed. In the US, the ISM Chicago PMI rose to 55.7, topping estimates for 53. Overseas, China said its HSBC PMI fell to 50.2, significantly below the flash estimate for 51.2.
Stocks rallied on Tuesday helped by upbeat manufacturing data as investors looked past the first partial government shutdown since 1996. The White House ordered federal departments to execute shutdown plans, leaving 800k people without work or pay until a deal is reached. The ISM manufacturing index jumped to the highest level in 2.5 years, easily beating estimates. Auto sales in the US remained healthy in Q3 which bodes well for the economy. Construction spending was delayed because of the government shutdown. Meanwhile, billionaire investor Carl Icahn met with Apple’s CEO and pushed hard for a $150 billion buyback. They are scheduled to meet again in a few weeks.
Stocks fell on Wednesday as the VIX continued to ramp higher. The VIX is largely considered a fear index and rises when stocks fall or when fear is elevated. ADP said private employers added 166k new jobs last month, missing estimates for 180k new jobs. Earnings season is just around the corner. According to Reuters, companies issuing negative outlooks for Q3 outnumber positive ones by 5.2-to-1. This is the largest negative reading since the 6.3-to-1 ratio in the second quarter. The ECB held rates steady and Mario Draghi said, “We view this recovery as weak, as fragile, as uneven,” He also reiterated his previous commitment to keeping rates at present or lower levels for an extended period of time.
THURSDAY & FRIDAY’S ACTION: Gov’t Is Closed
Stocks fell hard on Thursday after gunshots were fired outside the Capitol building and the government remained shutdown for the third day. The DJIA fell 180 points after Obama said he will not meet Republican demands in exchange for operating the government. After those comments, the President met with Congressional leaders but failed to resolve the budget deadlock. The Treasury said the US will exhaust its borrowing limit on October 17 unless Congress votes to raise the debt ceiling. If the US defaults, it will be the first default in US history! Weekly jobless claims rose by 1k to a seasonally adjusted 308k which missed estimates for 314k. Separately, growth in the service sector eased in September compared to August’s level. The ISM service index slid to 54.4, missing estimates for 57. Stocks were quiet on Friday as the world waited for a deal in DC. October’s jobs report was postponed because of the shutdown.
MARKET OUTLOOK: SPX Defends 50 DMA Line
The market is pulling back and it will be important to see if the bulls can quell the bear’s efforts. Remember, we focus more on how stocks react to the news than the news itself. We will see what happens in D.C. and then look forward to earnings season. Please note that our goal is to remain in sync with the broader trend of the market (up or down) and not get caught up with the minutiae of changing labels on the market status very often. As always, keep your losses small and never argue with the tape.