After major storms, the market tends to trade on lower volume, however today is the last day of the month and the last day of the fiscal year for 21% of the nation’s open-end mutual funds. With trading shut down for four straight days, that means these funds and other institutions will have to make month-end and year-end tax and performance decisions today, so volume could be above the daily average of 6.5 billion shares*
There are losing positions these funds don’t want to show in their annual report, but also potential winners they do want to show !!
TODAY: Stock-index futures indicate a positive open. Resistance starts at DJIA 13,247 (S&P 500: 1426). Minor support is DJIA 13,065 (S&P 500: 1406)
Key support is DJIA 13,040 (S&P 500: 1403) A break below those levels calls for a break below 13,000 for the Dow and 1400 for the S&P).
Investor’s first read – an edge before the market opens
DJIA: 13,107.21 Friday closea
S&P 500: 1411.91
Nasdaq Comp.: 2987.95
Russell 2000: 813.25
(Wednesday, October 31, 2012 (9:09 a.m.)
Superstorm Sandy cost Q4’s economy an estimated $25 billion which could lop off 0.5 percentage points from the quarter’s growth estimated at an annual rate of 1.6%. But spending on a recovery stands to add to the economy in coming quarters – not exactly a wash, but an offset.
I believe an increased cash position is justified. How large depends on one’s tolerance for risk.
The divisiveness in Congress and the horrors of the fiscal cliff, combined with uncertainty about corporate earnings in coming quarters is not a formula for a stable market environment in coming months. It stands to keep institutional investors on the sidelines, even trigger some selling and lower prices.
Even factoring in a 4% drop in the market so far, prices do not discount the potential for a further drop as the 24/7 press will soon turn to the fiscal cliff (sequestration) and Congress’ unwillingness to compromise to avoid automatic spending cuts and the potential for an expiration of the Bush-era tax cuts.
However, a correction from here would set up an excellent buying opportunity as the market finds a comfort level but at lower prices.
POLITICAL/STOCK MARKET PATTERNS:
In 8 days we will have the election behind us, but not the uncertainty. If President Obama is re-elected the market should drop in face of a continued stalemate in Congress over the fiscal cliff. If Gov. Romney wins, the market should spike up, but any important decision on the fiscal cliff will be postponed until he is in office long enough to establish his administration. Delay equals uncertainty, which is not good for the market.
According to the Stock Trader’s Almanac, going back to WWII, there were no major losses in October when the incumbent party stayed in power. The following November performed poorly when the incumbent stayed in power, but did better when it was ousted.**
The dynamics here depend a lot on whether the market is up or down sharply on election day.
Historically, there is a more pronounced decline for months prior to an incumbent being ousted, reflecting adverse conditions that led up to a change. The market’s decline only started in early October with an acceleration over the last six days. For the four months prior to that it was up steadily, hardly reflecting an unhappy investment community.
The DJIA closed at 13,437 and the S&P 500 at 1440 on September 28. No seasonality or pattern is flawless. The Stock Trader’s Almanac has been doing studies like this since the late 1960’s.
This week will produce a lot of economic reports that will shed some light on the economy, not the least of which are the ADP Employment report at 8:15 Thursday and Employment Situation report Friday at 8:30. The latter includes the Unemployment Rate which last month came in at 7.8%. It had political significance last month. Critics of its viability will be watching closely.
NOTE: Due to the storm, the Employment Situation report may be delayed, Estimates are currently that the Unemployment rate will come in at 7.9% vs. 7,8% in the last report.
ECONOMY: Big week for reports, especially employment related reports Wednesday and Friday.
MONDAY:
Personal Income 8:30) – Rose 0.8% in September after a gain of 0.5% in August.
Dallas Fed Manufacturing Svy (10:30) – Rose 1,8 points in October to a plus 0.9, the first increase since June.
TUESDAY:
S&P Case-Shiller Home Price Ix (9:00) – August year on year home prices rose 2.0% vs. a rise of 1.3% in July indicating an acceleration in the rebound of home prices
Consumer Confidence (10:00) – Delayed until Thursday
WEDNESDAY:
Chicago PMI (9:45) – Dropped 3.3 points in September to 49.7. New orders dropped 7.4 points to 47.4.
THURSDAY:
ADP Employment (8:15) – ADP Private payrolls increased 162,000.
Jobless Claims (8:30) – Dropped 23,000 in the October 20 week after a revised increase of 46,000 the prior week after a drop of 27,000 the week before.
Productivity/Costs 8:30) – Revised up in Q2 to a 2.2% annual rate vs. a 0.5% drop in Q1.
ISM Manufacturing Ix (10:00)- Rebounded in September to 51.5 from 49.5 in August, New orders also increased to 52.3 from47.1.
Construction Spending (10:00) – Dropped 0.6% in August after a 0.4% drop in July
FRIDAY:
Employment Situation (8:30) – Nonfarm payrolls increased 114,000 in September after a 142,000 rise in August. Workweek was up to 34.5 hours from 34.4. Unemployment rate dropped to 7.8%
Factory Orders (10:00) – Dropped 5.2% in August due to a temporary drop in aircraft orders.
FACEBOOK (FB – $21.94): FB spent the last 3 trading days consolidating Wednesday’s 5-point spurt in response to better than expected earnings. Stock should get some buying around 21.60. This correction is orderly suggesting buyers are allowing sellers to exit but at slightly lower prices throughout each day.
I don’t own, nor have I ever owned FB. Generally, I don’t recommend or comment on individual stocks. I started covering FB technically after its IPO because on May 21, I felt at $34 it was very vulnerable in face of all the misunderstanding and hype. I warned of a drop to $24-26, which it did shortly thereafter. Following a rally back into the 30s, FB dropped into the low 20s where on August 2, I forecast a low of $16.88. On September 4, it hit $17.55, its low since its IPO at $38.
George Brooks
*Bloomberg.com
**Stock Trader’s Almanac: This is a “must own” publication, loaded with daily, weekly, monthly savvy. It is “the source” for strategies, seasonalities, recurring events, useful stats. Published annually, I have used it every year since 1968. Nothing compares !
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The writer of Investor’s first read, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.
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