The Past Week: Tough But Bulls Are Still In Charge!
Wall Street Posts Bullish 3Q, But Economic Concerns Linger!
The Stock Market: Lackluster Domestic Data Augments Weekly Losses, But Can't Halt Third-Quarter Rise!
by Ian Harvey
September 29, 2012
Wall Street closed its best third quarter since 2010 after a wave of central bank actions sparked a dramatic reversal in equity markets, but signs of weakness in the economy drove stocks lower Friday of the past week.
The S&P 500 climbed 5.9 percent over the past three months as central banks geared up to boost liquidity to markets and kick-start their flagging economies. The move has lifted the benchmark index as much as 17 percent this year, recently pushing the S&P to its best level in five years.
Last Thursday’s rally interrupted the five-day slide, but the relief was short-lived as stocks were hit hard again on Friday. Most of the major averages closed lower, but above the worst levels.
Friday saw investors grappling with more disappointing U.S. economic data as business activity in the U.S. Midwest contracted for the first time since 2009. The news came on the heels of other weak regional manufacturing reports and a sharp drop in U.S. durable goods orders last month.
The Euro crisis again returned to the front burner for the first time since the ECB decision in early September. Stocks dropped sharply early Friday over concerns about Spanish banks' stress tests. The report was within expectations, so stocks did manage to rebound from the early-morning lows -- but could not make it back into positive territory.
• The Dow Jones Industrial Average (DJI) buckled more than 1% on the week to finish at 13437.13. However, the Dow enjoyed a 2.6% rally during September, and for the third quarter, the index surged 4.3%.
• The Standard & Poor's 500 Index (SPX) sawed off 1.3% for the week to end at 1440.67, However, the SPX jumped 2.4% for the month, and for the third-quarter returned 5.8%.
• The Nasdaq Composite Index (COMP) declined 2% to 3116.23 for the past week. But, the COMP tacked on 1.6% in September. Its quarterly total arrived at a gain of 6.2%, which is the best of its fellow benchmarks.
All in all, the stock market is doing pretty well. It took some shots this past week, but in looking at the SPX chart below, the uptrend remains intact. A lot probably hinges on the upcoming debate, but for now, the bulls are still in charge.
Home Depot (HD) was the biggest gainer on the blue-chip index for the quarter, while H-P (HPQ) was the worst performer. Most key S&P sectors posted gains for the quarter, led by energy, while utilities sagged.
The CBOE Market Volatility Index (VIX), widely considered the best gauge of fear in the stock market, battled its way back atop the 15 mark on Friday of the past week, adding 0.9 point, or 6%. The stock market's fear gauge lifted 12.5% on the week, but saw a monthly loss of nearly 10%. For the third quarter, the VIX was down 7.9%.
TOP OPTIONS TRADES SINCE JULY 01, 2012
|DLTR Aug 110 Calls||32%||UIS Oct 17 Calls||79%|
|HSY Aug 70 Calls||56%||TSO Nov 25 Calls||54%|
|NKE Oct 92.50 Calls||49%||HLF July 47.50 Calls (again)||38%|
|FB Aug 25.00 Puts||500%||DISH Sept 30.00 Calls||100%|
|APPL Jan 13 650.00 Calls||71%||CSTR Oct 42.50 Puts||400%|
|LNKD Aug 92.50 Puts||30%||LNKD Aug 100.00 Calls||250%|
|SLV Nov 30.00 Calls||114%||JCP Nov 25.00 Calls||67%|
|GLD Nov 165.00 Calls||72%||LVS Dec 45.00 Calls||67%|
|GLD Oct 170.00 Calls||52%||MON Jan 2013 87.50 Calls||26%|
The December crude-oil contract dropped just below the 50% 'Fibonacci Retracement’ support from the June lows, as it hit $88.95 before rebounding, Crude closed the week $2 a barrel above the lows, but was still down slightly.
A move back above the $94 level should be enough to the reverse the downside momentum. While crude oil prices have been dropped, gasoline prices continue to move sharply higher, which will not help consumer sentiment.
The SPDR Gold Trust (GLD) closed the past week just a bit lower, trading in about a $7 range since September 13.
For most of the summer, GLD traded in a fairly tight range, as the levels of support at $148.40 to $148.60 and resistance at $156.80 to $158.46 were well established.
Since July 27, GLD has closed up eight out of ten weeks, with GLD up almost 10% in just the past six weeks. During the summer there were few articles about gold, but now it is very hard to find anyone who is bearish, as the newly minted bulls try to outdo each other with higher and higher upside forecasts.
Buying of gold at the present time with the sharp increase in bullish sentiment makes the risk on new long positions uncomfortably high.
If there is a further correction, it should set the stage for another new rally high that could mark a short-term top. The way analysts are raising their price forecasts for gold is similar to the stock market last spring, when the S&P targets kept moving higher a month before stocks topped out.
The best risk-reward buy point for those who are not long will come after a more sustained correction where the risk can be better controlled.
Company News and Earnings in the Past Week
• Nike Inc (NKE) warned of slowing orders in China, becoming the latest company to sound a note of caution about how economic weakness in the world's second-largest economy was affecting its business. Nike's stock fell 1.1 percent to $94.91.
• Bank of America (BAC) said it will pay $2.43 billion to settle a class action lawsuit initiated in 2009 over its purchase of Merrill Lynch.
• Research in Motion (RIMM) shares soared after the BlackBerry-maker posted quarterly resulted that topped expectations on the top and bottom lines.
• Apple’s (AAPL) iPhone 5 rolls out to another 22 countries. Separately, CEO Tim Cook apologized for the frustration that its maps application has caused since the company updated its operating system that replaced Google (GOOG) Maps with Apple's own application.
• Facebook (FB) was sharply higher after the social-networking giant unveiled a new feature that would allow users to send "gifts" to their Facebook friends, sending shares up sharply. Meanwhile, Amazon.com (AMZN) announced it is planning an online marketplace for wine sales.
• McDonald's (MCD) declined after the fast-food chain was downgraded to "neutral" from "buy" at Janney Capital. Rival Yum Brands (YUM) also traded lower.
Economic News in the Past Week
Offsetting the relatively positive news from Spain in the past week was a worrisome report on U.S. manufacturing.
The Institute for Supply Management-Chicago's PMI gauge sunk to 49.7 in September from 53 in August, suggesting the Midwest manufacturing sector shrunk for the first time since September 2009. Economists expected the closely-watched indicator to hold steady for the month.
Also, a separate report showed consumer sentiment waned in late September from earlier in the month. The Reuters/University of Michigan survey checked in at 78.3 from an earlier reading of 79, missing expectations of a slighter dip to 79.
The Commerce Department said consumer spending rose 0.5% in August from July as expected, the largest rise since February. Personal income rose 0.1%, slightly under the 0.2% expected.
The latest quarter saw the European Central Bank, German officials and other players in Europe step up efforts to preserve the euro zone, which took a potentially severe market risk off the table.
In Friday's session, stocks came off their lows after Spanish bank stress tests were released, and were mostly within expectations. The independent audit showed banks will need 59.3 billion euros ($76.3 billion) in extra capital to ride out a serious downturn.
But Spain still remains mired in difficulties. Moody's review of the country's credit rating could add to its challenges. On Thursday, ratings agency Egan-Jones cut Spain's sovereign rating further into junk status, citing the country's faltering banks and struggling regional governments.
The euro fell against the dollar on Friday, declining for a second straight week, as uncertainty persisted about Spain's prospects for receiving a bailout to prop up its ailing banks.
Recent protests in Spain and Greece against austerity plans have also heightened investors' concerns as the turmoil could impede political maneuvering.
The NYSE Composite in the Past Week
The NYSE Composite has pulled back to the support from the May highs (line a) and closed Friday just barely above its flat 20-day ’Exponential Moving Average’ (EMA). A drop below last week’s lows will signal a deeper correction. The daily uptrend (line b) is at 7,950, about 3.7% below current levels.
The NYSE advance/decline (A/D) lines tested its uptrend (line d) and its WMA average last week. A drop below last week will be a short-term negative.
Sentiment in the Past Week
The sentiment picture is also mixed, as individual investors are still not enthusiastic about the stock market—only 36.4% are bullish. The financial newsletter writers became slightly less bullish in the past week, at 51% (down from 54.2%), which is still closer to bullish extremes than bearish ones.
The Major ETFs in the Past Week
As expected, early in the past week, the selling continued. By Wednesday, many of the major Exchange-Traded Funds -- ETFs -- reached more important support. The sharp rally took the major averages well off the lows, and despite the heavy selling early Friday, Wednesday’s lows did hold in all except the Dow Industrials.
It is still clearly a mixed market, as while the technical studies on the NYSE Composite and Russell 2000 still suggest that this is just a correction, the S&P 500 and Nasdaq 100 look much weaker.
The sentiment picture is also mixed, as individual investors are still not enthusiastic about the stock market—only 36.4% are bullish.
In March, the Dow Jones Pring US Business Cycle Index was launched. It is a gauge designed in collaboration with Pring Research to reflect its proprietary investment strategy, which tactically allocates among stock, bond, commodity, and cash segments based on the phase of the economic business cycle.
According to Martin, since 1955 the index has had an annualized monthly average gain of 10.05%, vs. 6.85% for the S&P. Currently, Martin says, “we are in Stage II (bullish for stocks and bonds), but headed very soon to Stage III, when commodities will go positive.”
As the chart indicates below, in Stage II the best sectors are banks, technology, and consumer discretionary. The Performance chart reveals how the SPDR S&P Bank ETF (KBE), Select Sector SPDR Technology (XLK), Select Sector SPDR Consumer Discretionary (XLY), and Spyder Trust (SPY) have done since the June lows.
The performance of all four was quite similar, with KBE leading up 14%, followed by XLK rising 13.7% and the other two just slightly above 12%.
Sector Focus in the Past Week
In Stage III of the business cycle, technology, transports, and oil drillers are typically the best sectors. Since June, Market Vectors Oil Service (OIH) has done the best, up just over 17%. It has corrected rather sharply from its highs, as it was up over 25% in the middle of September.
The Select Sector SPDR Technology (XLK) and Spyder Trust (SPY) are about even since the June lows, while the iShares Dow Jones Transportation (IYT) is flat for the same time period.
All the key sectors except the Select Sector SPDR Utilities (XLU) are lower for the past week. The Select Sector SPDR Materials (XLB), Select Sector SPDR Energy (XLE), and Select Sector SPDR Technology (XLK) were all down close to 2%.
The Select Sector SPDR Health Care (XLV) and the Select Sector SPDR Consumer Staples (XLP) were down 0.4% and 0.7% respectively.
Pledges by the European Central Bank, the Federal Reserve and the Bank of Japan to buy government bonds helped cement a summer rally in stocks and commodities.
But to re-cap, the Dow climbed 4.3%, the S&P 500 rallied 5.8% and the Nasdaq roared 6.2% to the upside. The energy, consumer discretionary, technology, telecommunications and financial sectors posted the best performance. The only major sector to end in the red was utilities.
Many energy and metal futures rallied during the quarter as well. Crude oil jumped 8.5% in its best showing since the final quarter of 2011. Meanwhile, wholesale New York Harbor gasoline surged some 22.5%.
Gold tacked on 10.5% and silver lurched higher by 25.2%.
The Federal Reserve unveiled an open-ended asset-purchase program dubbed QE3 earlier in September. The central bank also pledged to take whatever action is necessary to jumpstart the ailing jobs market.
Additionally, the European Central Bank said it would buy the sovereign debt of countries struggling with high borrowing costs on certain conditions. The People's Bank of China, Bank of England and Bank of Japan also provide easing measures.
However, the stock market lost some of their luster after the announcements from the central banks in the first half of September. After pulling back 1.7 percent over the last two weeks, the S&P 500 is now up 14.6 percent so far this year. The S&P 500's drop of 1.3 percent this past week is its worst weekly decline since the start of June.
The coming months hold a series of difficult challenges for markets, including third-quarter earnings season, which is expected to show the first drop in earnings since 2009, and the U.S. presidential election in November.
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