Stocks ended lower last week ahead of the long holiday weekend. On Friday 8/28 we wrote, "Typically, massive sell-offs do not recover overnight. Additionally, massive selloffs were followed by record volatility leads to lower - not higher - prices...especially when they occur in aging bull markets. Right now, nearly every major market around the world is trading like a penny stock (wild percent swings - up and down) and that typically bodes poorly for stocks. The only wild card remains the Fed and other government intervention." The market is moving sideways to digest August's violent sell off. From where we sit, in the short term, the next level of support is 1867 in the S&P 500, and the next level of resistance is 1993. By definition, until either level is breached, we expect this sideways action to continue.
We would be remiss not to note that the major indices are very extended to the downside and a slight bounce higher (in normal periods) should be expected. Now that the jobs report is behind us - the next "big" data point will come on September 17, when Fed concludes its next meeting and holds a press conference. Until then, economic data remains relatively light. Remember, the Fed has put on the perfect hedge by saying they are data dependent: If the data improves it gives them the option to raise rates, and if the data deteriorates (present situation) they can easily justify not raising rates and/or another round of QE (printing money). The problem is that even with rates at zero and other central banks printing money, global economic demand remains lackluster at best. So the Fed's conundrum is that Main Street is barely growing, even with rates at zero. The "data" does not justify a rate hike at this point. Intermediate and longer term, markets around the world are clearly forecasting another global recession and, notwithinstanding more Fed easing, the path of least resistance is lower for stocks. Defense is king until the S&P 500 trades above 2040. On the downside, if 1867 is breached we have to expect another big leg lower for stocks.
Monday-Wednesday's Action: Wild Swings Continue
Stocks fell on Monday on the latest trading day of the month. The major US indices fell over six percent in August, posting their worst monthly decline in several years. The big news came from oil. Oil prices continued their week-long surge. Over the past five days, oil surged a whopping +29%, after falling -37% in the past 10 weeks! It's not just crude, stocks, currencies and commodities are trading all over the map. The fact that global markets are trading like penny stocks bodes poorly for our market and suggests lower prices will follow.
The Dow fell 469 points on Tuesday after China's official Purchasing Managers Index slid to 49.7, the lowest level in three years and reignited growth concerns. The reading missed estimates and fell below July's reading of 50. Remember, a reading below 50 indicates contraction and bodes poorly for the global growth story. In the US, the PMI manufacturing index slid to 53, which matched the low end of estimates. The ISM manufacturing index slid to 51.1, missing estimates for 52.8. Crude oil plunged nearly 10% on the news for its largest decline in seven months. This followed its largest advance in 25 years! As previously mentioned, the fact that global markets are trading like penny stocks is typically not a good sign.
Stocks rallied nicely on Wednesday after China's Shanghai composite ended down 0.2% after falling nearly five percent intraday. The very powerful late day reversal to the upside set the stage for US stocks to rally and was believed to be from people supported directly by the government. Very fun times we live in! The Markets in China will be closed on Thursday and Friday due to a World War II anniversary holiday. In the US, the ADP private employment index came in at 190k, missing estimates for around 200k. Factory orders came in at 0.4%, missing estimates for 0.9%. At 2 PM EST, the Fed's Beige Book, which will be used in their next meeting on September 17, 2015, showed moderate to modest growth in 11 of the 12 districts across the country.
Stocks Fall Ahead Of The Long Weekend
Stocks were quiet on Thursday as the market paused to digest the wild swings we have seen nearly everyday for the past few weeks. Economic data was light. In the US, the PMI service index came in at 56.1, beating estimates for 55.2. The ISM service index came in at 59, barely beating estimates for 58.5. Stocks opened lower on Friday after August's jobs report was released and the headline number missed estimates. Before Friday's open, the Labor Department said US employers added 173k new jobs in August, missing Bloomberg's estimate for 223k.
The unemployment rate slid to 5.1%, beating estimates for 5.2%. Fifteen minutes before the report was released, Fed official Jeffrey Lacker said in a pre-scheduled speech, that "It’s Time for Fed to End Era of Zero Interest Rates and that August's jobs report is unlikely to "materially alter" the picture. For the last few weeks, we have seen conflicting opinions from within the Fed on when they should raise rates. That uncertainty continues to hurt investor confidence. The US stock market will be closed on Monday in observance of the Labor Day Holiday.
Market Outlook: A Major Top?
Every bull market in history has a definitive beginning and end. It is important to note that with each day that passes, we are getting closer to the end and further away from the beginning. This bull market is aging by any normal definition and celebrated its 6th anniversary in March 2015. The last two major bull markets ended shortly after their fifth anniversary; 1994-2000 & 2002-Oct 2007. As always, keep your losses small and never argue with the tape. If you want exact entry and exit points in leading stocks, or access more of Adam's commentary/thoughts on the market, join FindLeadingStocks.com.
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