The Past Week: Month-End Selloff -- Stocks Drop More Than 1%!
Stock Market: Major Averages Still Higher for May!
Wall Street: Fed Speculation Upsets Market Direction!
by Ian Harvey
June 03, 2013
In the past week, stocks fell and bond yields surged after Fed Chairman Ben Bernanke said the U.S. central bank may decide to taper its stimulus programs in the next few policy meetings if data shows the economy is gaining traction.
Stocks posted their second straight week of losses on Friday, mostly on fears that the Fed would curb its bond-buying program sooner than most people expected. This was the worst one-day drop since mid-April for the Dow and S&P 500, but major averages still logged monthly gains.
Traders cited technical reasons for the sharp late-afternoon selloff on Friday in addition to month-end rebalancing and window dressing.
The selling was very violent in the last 30 minutes on Friday, and as to whether it was for the reasons stated above or due to a more sinister action -- such as a market correction – will not be known until the week ahead.
The downturn has caused the daily technical studies to turn more negative; up until lunchtime, only the NYSE Advance/Decline line actually looked negative. Both the Dow Industrials and the S&P 500 closed below the prior week's lows.
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• The Dow Jones Industrial Average (DJI) lost 1.2 percent in the past week to close at 15,115.57.
Friday was the eighth session in a row where the blue-chip index traded in a triple-digit trading range.
• The Standard & Poor's 500 Index (SPX), widely used by mutual funds as a proxy for the stock market, dropped 1.1 percent in the past week, to settle at 1,630.74.
• And the Nasdaq Composite Index (COMP) also dropped 0.1 percent, to finish at 3,455.91.
• The CBOE Market Volatility Index (VIX) , widely considered the best gauge of fear in the market, moved sharply higher amid Friday's selling, tacking on 1.8 points, or 12.2%, to close at 16.30.
The VIX -- which closed at its highest level since April 18 -- rallied 16.5% this past week and 20.6% this month.
The Market Performance for the Month
With the monthly gains, the Dow posted its sixth-consecutive month of gains and the S&P 500 and Nasdaq logged their seventh-straight month in positive territory. And so far in 2013, all three major averages have surged nearly 15 percent each.
Despite Friday's losses, all three indexes ended May in the black. The Dow and S&P 500 both gained about 2%, while the Nasdaq advanced nearly 4%.
For the month, cyclical sectors including financials, industrials and techs were the best performers, while defensive sectors utilities, telecoms, and consumer staples ended in the red.
It's the first time the Dow has ended higher in May since 2009.
Hewlett-Packard (HPQ) was the best performing blue chip in May. Shares of the PC maker rose nearly 20% this month. Cisco (CSCO) and JPMorgan (JPM) have also logged double-digit percentage gains.
The main laggards were safe-haven stocks that investors had flocked to earlier this year because they pay dividends. Telecoms, Verizon (VZ) and AT&T (T) were the worst Dow performers this month, along with consumer staples McDonalds (MCD) and Coca-Cola (KO).
The rush out of safe haven investments has also hurt the bond market. Yields on the 10-year Treasury note rose to a high of 2.2% earlier this week, up from about 1.6% at the end of April.
It has been a very volatile week in many of the world markets.
Asian markets ended the week with mixed results. The Nikkei advanced by 1.4%, rebounding from Thursday's steep decline brought on by mounting concerns over the country's economic turnaround plan.
While much of the attention has been focused on the 5.7% drop in the Nikkei-225 last week, many overlook that the total loss has been closer to 9% in just the past two weeks.
Emerging markets have also had a tough 2013, and most are lower for the year. Latin America has been hit especially hard. This chart shows that the region's exports to China have dropped steadily since 2010.
Brazil is fighting a weak economy, and their central bank has raised rates to fight inflation. The GDPs of Brazil, Mexico, and Chile are lower in the first quarter of 2013 than they were in the last quarter of 2012.
Though euro concerns have been on the back burner recently, the data for some countries is troubling. Portugal is the latest country where leaving the Eurozone is being discussed.
The Bond Market in the Past Week
An equally important development in the past week was in the bond market. The weekly chart of the T-Bond yields has completed its reverse head-and-shoulders bottom formation.
This indicates that yields could rise from their current level of 3.3% to 4%, which is the upside target from the formation. To complete a similar formation on the ten-year T-Note yield chart, the yield would have to close above 2.39%.
This is already being felt by many bondholders. The chart of the Vanguard Total Bond Market Index (VBMFX), with assets of over $116 billion, also completed its head-and-shoulders top, having gapped below its neckline last week. This fund yields 2.47%, but is already down 3.2% from the July 2012 high of $11.25.
The downside target from the H&S top is in the $10.60 to $10.65 area. Even though the weekly trend is now toward higher yields, it would a very large rise before one could conclude that the 30-plus-year bull market in bonds is really over.
The decline in the junk-bond market has been even more serious. The spread between junk-bond yields and Treasuries has risen sharply, which does not normally occur when Treasury yields rise.
The flow of money into bond funds this year has been huge, with $187 billion issued so far this year.
The iShares Dow Jones Transportation (IYT) was down again last week, closing just barely above the prior week's lows. Two consecutive lower weekly closes is not a good sign. The monthly S1 support is at $110.31, with the quarterly pivot support at $105.33.
Once again, in the past week, the defensive sectors were under pressure. The Select Sector SPDR Utilities (XLU) closed down another 2.2% after losing 4% the prior week.
The biggest loser was the Select Sector SPDR Consumer Staples (XLP), down 3.2%, while the Select Sector SPDR Health Care (XLV) lost 1%.
The Select Sector SPDR Financials (XLF) did the best, up about 1.3%, followed by a 0.7% gain in the Select Sector SPDR Technology (XLK). The weekly chart shows that it has been testing its weekly Starc band for the past three weeks after breaking out above the September highs (line a).
XLK's weekly relative performance appears to have bottomed, as it has formed higher lows and moved back above its WMA. It will still need to be watched on any further correction. The on-balance volume (OBV) is trying to turn after testing its WMA, which is also a positive sign.
It appears that Apple is bottoming -- Apple (AAPL) triggered a monthly HCD on Friday, as it closed above the April doji highs. The daily chart also shows a reverse H&S bottom formation, which has yet to be completed.
Company News for the Past Week
Dell eked out a gain after news that a special committee recommended that shareholders approve the bid from founder Michael Dell and Silver Lake to take the computer maker private.
Among earnings, Lions Gate rallied after the entertainment company topped earnings expectations, thanks to its box-office success of "The Hunger Games" and the company's acquisition last year of independent studio Summit Entertainment.
Krispy Kreme zipped higher after the doughnut maker easily topped earnings expectations and also raised its full-year guidance.
Crude oil closed near the past week's lows. The final price was down $2.06 per barrel.
Oil is looking more vulnerable technically. The weekly close was below the prior three weeks' lows, so look for lower prices again in the week ahead. The monthly pivot support is at $86.11, which is almost $6 below current levels.
The SPDR Gold Trust (GLD) has been trying to bottom, but was hit hard again last week, as gold dropped over $25 on Friday. It did manage to close the week a bit higher.
The OBV shows a potential bottom formation (line c), but needs to move above its WMA and then the downtrend (line b) to confirm. There is major resistance for GLD in the $148 area.
Economic Reports in the Past Week
The past week's data on the US economy was positive overall. The S&P Case-Shiller Housing Price Index showed a year-over-year gain of 10.1%, the best one-month reading since 2005.
The consumer also seems to be quite optimistic because of the strong stock market and higher house prices. The Conference Board's Consumer Confidence and the consumer sentiment numbers from the University of Michigan were both better than expected. The sentiment data released on Friday improved 8.1 points from April.
The GDP for the first quarter was revised downward, but is still in a positive trend overall.
• Consumer Confidence
The Conference Board's Consumer Confidence Index showed a sharp rise in May, helping to trigger investor risk appetite on Tuesday. The index rose from 68.1 in April to 76.2 in May. This compared to consensus estimates calling for a rise to 72.5. The latest reading was the highest since February 2008.
• Jobless Claims
Initial jobless claims rose for the week ending May 25 to 354,000 from 344,000 in the prior week. This compared to the consensus which expected a fall to 340,000.
Continuing claims for the week ending May 18 rose by 63,000 to 2.986 million. This came in below the consensus which expected continuing jobless claims to rise to 3.00 million.
• GDP - Second Estimate
According to the second estimate for the first-quarter of 2013, GDP rose 2.4 percent. This was a strong advance compared to the 0.4 percent in GDP growth for the fourth-quarter, but less than the advance estimate of 2.5 percent.
• Pending Home Sales
Pending home sales for April rose by 0.3 percent. This was below the consensus which expected a rise of 1.5 percent. In the prior month, home sales rose by 1.5 percent.
• Durable Goods
Durable goods orders rose 3.3 percent in April after falling 5.9 percent for March. This came in ahead of the consensus which expected durable goods orders to rise 1.6 percent. Excluding transportation, durable goods orders increased 1.3 percent in April after falling 1.7 percent in March. This compared to consensus estimates calling for an increase in durable goods for April of 0.5 percent.
Conclusion for the Past Week
While all three major averages finished lower for the second-consecutive week, the Dow rallied 1.86 percent, the S&P 500 jumped 2.08 percent, and the Nasdaq soared 3.82 percent for the month of May, defying the traditional Wall Street slogan: "Sell in May and go away."
However, the late-day sell-off on Friday and the close of several major averages below the prior week's lows indicate that the May 22 highs will not be challenged for some time.
It maybe that further selling will occur in the week ahead, though the S&P 500 is likely to bounce from the 1,585 to 1,600 level. A rebound will probably fail around 1,640 to 1,650, and this will need to be watched closely, as it may provide an opportunity to hedge one's portfolio.