The Past Week: A Correction!
Wall Street Dominated by Election News!
The Stock Market: Posts Worst Weekly Loss in 4 Months!
by Ian Harvey
October 13, 2012
The market's desultory performance came as the first week of earnings season ended.
Earnings season got underway this past week, although the few results that trickled in were less than inspiring. Alcoa, Costco, JP Morgan, and Wells Fargo all slumped after reporting, putting the onus on the week ahead and the lineup to come through.
The lousy start to earnings contributed to a down week for the stock market, as the major indices all slumped more than 2%. Gold continued to fall away from the $1,800 level, while oil firmed a bit to move above the $90 mark.
All in all, this was another week dominated by the election (including Thursday's VP pit bull debate) rather than any market-shaking news. However, those will likely change with the week ahead and the flood of major earnings reports.
Stocks moved lower in the past week, as the rally attempt on Thursday fizzled and stocks closed mixed on Friday.
However, some good news emerged when the U.S. consumer sentiment unexpectedly rose to its highest level in five years in October in the latest in a string of encouraging signs for the economy that may boost President Obama's re-election hopes as voters go to the polls next month.
• The Dow Jones Industrial Average (DJI) closed out the past week with a loss of 2.1%, marking its worst weekly close since the beginning of September.
• The Standard & Poor's 500 Index (SPX) fell 2.2 percent this past week, its biggest weekly percentage drop since June, on caution about the season after a number of bellwethers cautioned on their outlooks, including Chevron Corp and Alcoa Inc.
Profits are being dragged down by material and energy stocks. Material sector earnings are seen dropping 24 percent, and energy sector results are expected to slide 19 percent.
• The Nasdaq Composite Index (COMP) had a 2.9% weekly defeat -- its lowest weekly reading in two months.
For the year, the Dow is up 9.1%, with the S&P 500 up 13.6% and the Nasdaq up 16.9%.
AT&T (T) led the weekly blue-chip laggards, while McDonald's (MCD) finished higher.
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%|
For some of the averages in the past week, it was the worst weekly loss of the past four months. The Spyder Trust (ARCA: SPY) has declined for three out of the past four weeks, but is still only down 3.4% from the highs.
Many measures of the stock market have relieved their overbought readings from the September 14 highs. On that day, more than 80% of the stocks on the NYSE Composite were above their 50-day moving average. This was one standard deviation above the mean of 57%.
Now only 57% of the stocks are above their 50-day MAs. A drop below 40% would be slightly oversold, but in June it hit a low of 11%, which was extremely oversold. In a market uptrend, the current reading is enough to support a new rally phase that could take the market to or above the recent highs.
The energy sector has the potential to fuel the next market rally. The performance chart above shows how the SPDR S&P Oil & Gas ETF (XOP), the Select Sector SPDR Energy (XLE), and the Spyder Trust (SPY) have done since the June lows.
On June 28, both XOP and XLE moved decisively above SPY, and have been outperforming the overall market ever since. For example, XOP is up over 22%, while XLE is up 16.3%, compared to an 11.5% gain in the S&P.
The chart shows that both XOP and XLE are well down from the highs on September 14, when they were up 31.3% and 23.5% respectively. It seems that these are close to completing their corrections, though one more drop to even stronger support is possible. Both still need to move above the prior three-week highs to indicate that their correction is over.
The energy sector has been holding up much better than crude oil prices, which finally broke their losing streak in the past week. If this sector is going to propel the market higher, then we should see some of the leading oil stocks turn higher in the next week or so.
Clearly, it is still a nervous market. Investors are becoming more concerned about the ”fiscal cliff” as we get closer to the end of the year.
The bond market appears to be getting more nervous about stocks, as the iShares Barclays 20+ Yr Treasury Bond (TLT) did break its downtrend with Friday’s close. As the 2012 performance chart indicates, TLT is back in positive territory for the year, as it bounced after hitting the zero line two weeks ago. TLT is now up 2.6% for the year, which is still well below SPY at 13.7% and GLD at 12.1%. The chart shows that GLD and SPY have been following the same pattern since the September highs. Crude oil is trying to stabilize, but is still in solidly negative territory.
The iShares Dow Jones Transportation (IYT) was about flat in the past week, with all of the other sectors showing losses.
Select Sector SPDR Technology (XLK) and Select Sector SPDR Consumer Staples (XLY) performed the worst, down about 3% and 2.7% respectively. The Select Sector SPDR Industrials (XLI), Select Sector SPDR Health Care (XLV), and Select Sector SPDR Materials (XLB) were all down close to 2%.
The better than expected earnings did not help JPMorgan Chase (JPM), as it was down over 1%, while Wells Fargo (WFC) was down over 3% after missing revenue estimates. The Select Sector SPDR Financials (XLF) was down 1.4% as a result.
The December crude-oil contract was higher in the past week, though it gave up some of its gains on Friday. It needs to close above the $94 level to indicate that it has bottomed out. The key 61.8% support at $87.40 still needs to be watched closely.
The SPDR Gold Trust (GLD) closed over $2 lower last week. It and has next important support in the $167 to $168 area. The short-term negative divergence in the On-balance Volume (OBV) (line b) was confirmed by the drop below support (line c). This is consistent with a further correction, but not a top, as the weekly and monthly OBV remain strong.
The daily chart shows that the 38.2% Fibonacci support is just above $164, with the daily uptrend (line a) at $162.25.
GLD now needs to close back above the $172 level to stabilize the short-term outlook.
Company News and Earnings in the Past Week
• Apple (AAPL) is expected to unveil its iPad mini at an invitation-only event on October 23, according to tech blog AllThingsD, citing sources.
• Wal-Mart (WMT) gained after Jefferies boosted its rating on the big-box retailer to "buy" from "hold."
• AMD (AMD) plunged after the chipmaker cut its third-quarter revenue guidance, citing weak product demand, prompting at least 12 brokerages to slash their price targets. Rival Intel (INTC) also slipped to trade near a 52-week low.
• Workday (WDAY) skyrocketed more than 70 percent in its market debut on the NYSE. The cloud-computing company opened at $48.05 a share after pricing shares above the expected range at $28. Workday's IPO marks the second largest in the tech sector this year after Facebook (FB) .
Economic News in the Past Week
The Thomson Reuters/University of Michigan's preliminary October reading on the overall index on consumer sentiment came in at 83.1, up from 78.3 the month before and the highest since September 2007.
Even the surprising jump in the University of Michigan’s Consumer sentiment couldn’t stabilize stocks, either in Europe or the US. The surge to 83.1 was well above the consensus view of 78.3, and as the chart indicates, this is the highest reading since January 2008. A separate reading on the 12-month economic outlook was up ten points, and both suggested a more optimistic view of future income prospects.
Also, the Labor Department said Friday that wholesale prices rose 1.1% in September. But most of the gain was from higher gasoline prices. Core prices, which don't count food and energy, were unchanged.
The downgrade of Spain’s credit rating to just above junk status led some analysts to conclude that they may be closer to requesting aid. This is what the 'European Central Bank - ECB' has been waiting for to start their bond-buying program. The ” Organization for Economic Co-operation and Development (OECD)” head warned Friday that the ECB’s delay in implementing their bond-buying support was hurting their credibility. Stocks in Europe lost 1.7% for the week, as their rally attempt also failed.
August data from the Eurozone on industrial production supported a slightly more positive outlook for third-quarter GDP. This helped offset the concern over sticking with the tight Eurozone austerity plans, as voiced by the IMF’s Christine Lagarde.
The DOW and Its History
For some long-term perspective, the chart below illustrates the Dow adjusted for inflation since 1900. Of interest is that the inflation-adjusted Dow has traded within the confines of an extremely long-term upward sloping trend channel over the past 112 years. It is also of interest that the secular bear market that concluded in the early 1980s was almost as severe as the one that concluded in the early 1930s.
Also, while the market action from the inflation-adjusted record high of 1999 to the financial crisis lows of 2009 was severe, the magnitude of this decline was much less than what occurred with the bear markets that concluded in the early 1930s and early 1980s.
More recently, the Dow has retraced 89% of the financial crisis bear market with the inflation-adjusted Dow currently trading 15% off its 1999 record high -- a rather dramatic turnaround considering the magnitude of the recent financial crisis.
Sentiment in the Past Week
The short-term technical outlook deteriorated at the end of the week, as most of the major averages did drop below the late September lows, signaling a short-term downtrend. So far, the decline from the February highs looks like a correction, not a significant top, which makes watching the key support levels quite important.
The sentiment picture turned more negative in the past week, which from a contrarian’s standpoint is an encouraging sign. The American Association of Individual Investors (AAII) reported that just 30.5% are bullish, with 38.3% bearish.
The number of bullish financial newsletter writers dropped slightly to 45.7%, which is down from the 54.2% reading on September 19. A drop back below 40% would be more encouraging, especially if it is accompanied by a pickup in the number of bears, which has been flat around 25%.
Also, the weekly figures from the Investors Intelligence (II) sentiment survey are out. Here are the highlights:
The bulls dropped a bit this past week, and the bears remained the same, so there was a slight dip in the bulls-minus-bears line. With the stock market near multi-year highs, it's encouraging that the bulls-minus-bears line is only about 20%. A difference of 40% is a level which is considered extreme. So, there could still be significant upside left in this rally.
The table below compares the current data to typical data since 2005. Optimism is not much higher than the average.
The NYSE Advance/Decline (A/D) line confirmed the September highs, but is very close now to the late September lows, as it has dropped back below its WMA. There is next important support at the April highs (line c), with the long-term uptrend at line d.
There is initial resistance at 8,300, and a daily close above 8,400 should signal that the correction is over.
The Major ETFs in the Past Week