Weekly Market Analysis: Week 39 Recap / Week 40 Preview

Weekly Recap

Dow Jones Industrial Average

CNN - DJI

Standard & Poor’s 500

CNN - SPX

Nasdaq Composite

CNN - NDX

The stock market began the new week on a cautious note. The S&P 500 lost 0.3%, but managed to erase more than half of its opening decline. Thanks to the rebound, the benchmark index reclaimed its 50-day moving average (1976.78) after slipping below that level in the morning. Equities slumped at the open amid a couple global developments that dampened the overall risk appetite. Continued student protests in Hong Kong and a potential response from China weighed on the Hang Seng index (-1.9%), while other regional indices held up relatively well with Japan’s Nikkei (+0.5%) and the Shanghai Composite (+0.4%) posting gains. Meanwhile in Europe, participants showed concerns about the Catalan independence referendum scheduled to take place on November 9. However, a twist was introduced to the story during the afternoon when the Spanish Constitutional Court announced it will block the independence vote.

On Tuesday, the market finished the third quarter on a defensive note with small caps leading the retreat. The S&P 500 shed 0.3% to narrow its Q3 gain to 0.6%, while the Russell 2000 (-1.5%) widened its quarterly loss to 7.9%. The retreat represented the second consecutive decline for the benchmark index, which registered a September loss of 1.6%. The S&P 500 displayed modest strength in the early going with help from influential sectors like technology (+0.2%), financials (-0.2%), and industrials (-0.1%), but slid from highs amid significant weakness in the two commodity-related sectors. Most notably, the energy space (-1.2%) widened its Q3 loss to 9.2% and was pressured by a 3.6% decline in crude oil, which fell to $91.16/bbl, registering a 13.6% loss for the quarter.

The stock market began October and the fourth quarter with a retreat. The major averages spent the day in a steady decline with the Nasdaq Composite leading the slide. The tech-heavy index lost 1.6%, while the S&P 500 (-1.3%) sliced through its 100-day moving average (1958) with nine sectors ending in the red. Equities were pressured from the start with a disappointing set of Manufacturing PMI figures from the eurozone weighing on sentiment. The region-wide reading slipped to 50.3 (expected 50.5) and was driven in part by Germany’s decline to 49.9 from 50.3 (consensus 50.3). Once the U.S. session got going, the key indices slumped amid early weakness in the industrial sector (-1.9%). In turn, the growth-sensitive group suffered from notable losses in airlines, stemming from concerns about the first case of Ebola in the United States. Delta Air Lines (DAL) and Southwest Airlines (LUV) both lost near 3.5%, while the Dow Jones Transportation Average tumbled 2.5%.

The major averages ended the Thursday session on a flat note despite showing broad-based weakness in the early going. The S&P 500 ended unchanged with four sectors in the green. Equity indices started the day near their flat lines, but commenced their retreat once European Central Bank President Mario Draghi concluded his press conference without providing much detail about the central bank’s ABS purchases. Furthermore, Mr. Draghi did not hint at plans for sovereign bond purchases, which had been the subject of conversation in recent weeks. To that point, diminished prospects of a full-scale QE program weighed on markets in Italy (-3.9%) and Spain (-3.1%) with bank shares leading the retreat. As for the U.S., equities slumped across the board in the morning, but staged an impressive reversal after reaching short-term oversold conditions just ahead of 12:00 ET. At that time, the S&P 500 hit its session low of 1925.93 and the TICK reading at the NYSE neared -1500—a level typically associated with excessive selling.

On Friday, the major averages finished a defensive week on an upbeat note. The S&P 500 gained 1.1% with nine sectors ending in the green. The rally helped the benchmark index narrow this week’s decline to 0.8% after being down near 3.0% at its lowest point on Thursday. Equities received a morning boost after the Nonfarm Payrolls report for September sailed past expectations. According to the Bureau of Labor Statistics, payrolls grew by 248,000, which was well ahead of the Briefing.com consensus estimate (210,000). The unemployment rate fell to 5.9% from 6.1%, but that resulted from a drop in the labor force participation rate.

Summary

“finally back after a 9 months long hiatus after settling my business and wedding matters”

Direction for Week 38 – DOWN

Week 38-39 is traditionally the end of the jittery Q3. Many would have heard of “sell in may and go away” but truth be told, May is not the most bearish month on the calendar year. Aug and Sept tends to be when “shit” hits the fan and market tends to be shaky; sideways volatile. That has been what we are seeing so far.

Market Internals

VIX

CNN - VIX

BRIEFING WEEKLY WRAP

SPDR ETF

VIX have been near the floor of 12-13 level for the most of the year except for 4 periods where it spiked above 16. Towards the end of the week, where Week 38 heading into Week 39 should be the turn in market momentum, we see a good rally in the market and an expected drop in the VIX, corresponding to the bullish close to the week. VIX hit a high of near 18, and lose 2% to close the week below 15.

In yet another volatile week, all the major indices closed flat to the down side. With the exception of Russell 2000, the major indices lost between 0.6 to 0.8% for the week. RUT is lagging the market, throwing in a performance of -1.3% for the week. Year to date, Nasdaq is still leading the market with a 7.2% gain while RUT is lagging with a 5.1% loss.

With the market in jittery, sideways volatile fashion, the sector breakdown reflects the exact same sentiments. Energy and Materials top the losers with losses of near 4%. On the other hand, Consumer Staples and Utilities led for the week with a 0.75% and 1.87% gain respectively. In a volatile week to the downside, the countercyclical sectors that led reflected the confusion in the market. The leaders and laggards were not as clear cut as it’s supposed to be.

In addition, the daily volumes for the week have been higher than prior week. With the exception of Monday, where volumes are below the 1 month average of 750m, Tues to Friday saw volumes ranging between 800m to 900m shares.

Technical Update

Dow Jones Industrial Average

TOS - DJI

DOW dipped below the crucial 17000 level at the start of the week after getting resisted by the 20D MA. 50D and 100D MA proved to be no support for the falling market until DOW hit the lower bank of a 2 years up-channel. On Thursday, we saw a Dragonfly Doji forming that coincided with the bottom bank of the uptrend channel. On Friday, in anticipation of the bounce, we saw one of the best bullish rally in the recent weeks to see DJI test the 17000 level again.

I dont see the 20D MA as much of a resistance for DJI. I would expect DJI to break 17000 level in the week to come. Any signs of start of the bullish year end rally has to have DJI finding solid support on the 17000 level.

Standard & Poor’s 500

TOS - SPX

Likewise, a Dragonfly Doji was formed on the SPX on Thursday. SPX isnt as clear cut as DJI, having broke down of its 2 years uptrending channel. It fought back on Friday to get itself back to the channel. I will be awaiting a confirmation sign to see if SPX can hold above 1950 level before it goest to test 2000 level again in the weeks to come.

Nasdaq Composite

TOS - NDX

NASDAQ Composite, being the best performer for the year, also threw up a Dragonfly Doji on Thursday. It found support off the bottom bank of the 2 years uptrending channel and its 100D MA. Moving forward, the 50D MA level might see COMPQ getting resisted there, as well as COMPQ testing the 4500 level. Before the traditional year end rally starts, I would love to see COMPQ closing above 4500 level and holding solid support at this level.

VIX

TOS - VIX

Year to date, VIX have been at a record low level with the exception of 4 periods prior to this spike. This week saw VIX went up to near 18 and VIX closed the week below 15. This coincided with the superb bullish rally in the end of the week. I will be paying close attention to VIX, and a possible spike back to 18 or even 21 because I have a gut feel that the worst might not be over.

Bond Market

BRIEFING BOND

10-Yr: -03/32..2.744%.. USD/JPY: 101.85.. EUR/USD: 1.3698

The Week in Review: 

  • Treasuries booked solid gains as the S&P 500 saw back to back weekly losses for just the third time in 2013.
  • Raising concerns on the macro level was continued economic weakness in both Asia and Europe and a slew of mixed U.S. economic data, not to mentionstudent-led pro-democracy protests in Hong Kong, and ebola fears as the first U.S. case has been confirmed.
  • Continued economic weakness in Japan has many participants expecting the Bank of Japan to up its QE program at some point.
  • Student-led protests for democracy in Hong Kong carried on for an eighth day and saw an escalation as protesters clashed with citizens who support Chinese rule.
  • The European Central Bank outlined its ABS program, indicating asset purchases will take place for at least two years; however, no sovereign bond buying was announced.
  • U.S. economic data was mostly disappointing as pending home sales (-1.0% actual v. -0.2% expected), Case-Shiller 20-city Index (6.7% actual v. 7.4% expected), Chicago PMI (60.5 actual v. 61.5 expected), consumer confidence (86.0 actual v. 92.0 expected), ISM Index (56.6 actual v. 58.5 expected), construction spending (-0.8% actual v. 0.4% expected), and factory orders (-10.1% actual v. -9.3% expected) highlighted the misses.
  • Nonfarm payrolls climbed 248K (210K expected) and the unemployment rate dipped to 5.9% (6.1% previous). Other data to top estimates included personal spending (0.5% actual v. 0.4% expected), PCE Prices – Core (0.1% actual v. 0.0% expected).
  • Friday’s post-nonfarm payrolls action was interesting as selling took place in the belly while buyers were in control at the long end.
  • Yields across the curve hit their lowest levels in a month.
  • Up front, the 2Y slipped -1bp to 0.563%. Action has spent the past month locked in a tight range between 0.500%/0.600% as neither bulls nor bears have been able to gain the upper hand.
  • In the belly, the 5Y eased -7bps to 1.737%. The yield pressed as low as 1.650% amid Thursday’s buying frenzy, but found support at the 200 dma.
  • The 10Y fell -8bps to 2.447%.  the benchmark yield tested support in the 2.400% region before probing the 50 dma (2.471%) in an initial response to Friday’s jobs report.
  • At the long end, the 30Y shed -8bps to 3.134%. Mid-week buying tested the 3.100% area, but so far action has avoid a rendezvous withe September low near 3.050%.
  • A flatter curve took hold as  the 2-10-yr spread narrowed to 188.5bps and the 5-30-yr spread tightened to 139.5bps.

Macroeconomic Data (upcoming)

FF CAL

Market Commentary

Cyclically, Week 39 (end of Sept) will see the sideways volatile movement being muted and early Oct tends to be the inflexion point to see if the market will tank or rally towards the end of year. Technically, most of the indices have hit bottom and this gives me one reason to be bullish in the weeks to come. However, earnings season will be starting soon and we should see further volatility in the market before a “clear sky” can be revealed.

On the horizon, Wed and Thurs should see more volatility as the FOMC Meeting Minutes and the Unemployment Claims will be announced. I am expecting to see Mon and Tues closing bullishly (less any bearish news) before a muted Wednesday till the FOMC minutes are announced. All eyes will be on the “when” the FED will possibly raise interest rates. Given that the Unemployment Rate went bellow 6% in the latest report, should the FED bring forward the date, this should send the market into panic mode.

With all else being equal, we should see a technical bounce and a positive week ahead.

Direction for Week 40 – UP