The week that was…
We ended last week’s “The Week Ahead” section with the sentence: “There should be some fireworks”. Indeed there were. To be clear we are not talking 2007 / 2008 type fireworks but within the context of a relatively sleepy fall 2016 these were fireworks. All 5 sessions this past week were to the downside. Following 4 the prior week. So since the Hillary Clinton #EmailGate disclosure 2 Fridays ago the market has not been able to put in a positive day. One doubts that’s unrelated.
The last nine session selloff ended on December 11, 1980 … roughly 36 years ago. The current nine-session loss is -3.07%. The nine-day selloff in 1980 was a far more dramatic -9.37%.
“People would rather miss out on the post-election rally than being caught wrong-footed if Trump indeed wins the presidency, which many assume will be bad for markets,” said Jennifer Ellison, principal at BOS, California-based investment advisory firm.
To that end, as FBI director Comey has indicated nothing new in these emails late Sunday, the dollar is rallying quite sharply.
Back to the market of last week; most of the selling was midweek. But perhaps more sinister was the selling on Friday when the market tried to rally on the employment data and despite oversold conditions, the rally failed miserably.
Mid week the Federal Reserve meeting was a non event…. as expected. But the indications seem to be there for a rate hike finally hitting in December. #FedSpeak
In announcing its decision, the Fed indicated that it doesn’t need for much more evidence to justify a move, boosting the chances of a hike at its final meeting of the year. “The committee judges that the case for an increase in the federal-funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of further progress toward its objectives,” the Fed said in a statement. Fed watchers latched on to the word “some” as confirmation that a December move is likely. Analysts at BNP Paribas now see about a 75% chance of a 25 basis point hike next month, compared with 65% before Wednesday’s meeting.
It was a very heavy week of news on the economic front. Monday saw Americans increasing spending in September by the fastest amount in three months; incomes also rose 0.3%. Tuesday brought ISM Manufacturing and construction spending.
The Institute for Supply Management manufacturing index rose to 51.9 in October, slightly surpassing the 51.7 forecast. Meanwhile construction spending declined 0.4% in September.
On Thursday we went back to the ISM, this time on the much larger non manufacturing part of the economy; there news was not quite as bright as the ISM services index fell to 54.8 in October from 57.1, and below the 56 forecast. Any reading over 50 still signals expansion! Friday came the big one with the economy adding 161,000 jobs in October, while the unemployment rate fell to 4.9%. Employment gains for September and August were revised up by 44,000. Hourly pay jumped 0.4%; wages have climbed 2.8% over the past year, the fastest 12-month increase since June 2009.
According to Bespoke Investment Group there is a great chance of an election hangover based on history. However keep in mind THIS year the market has been selling off INTO the election (not rallying as it usually does) and with very oversold levels going into Tuesday you could see the opposite.
Since 1928—when Herbert Hoover was elected—the S&P 500 generally has suffered in the week after the election, posting an average decline of 1%, according to Bespoke Investment Group. “Returns more recently have been even poorer, with an average decline of 2.0% (median: -2.54%) and declines in seven of the last 10 presidential elections,” said analysts at Bespoke in a report.
The stock market tends to rise before decision day, with the S&P 500 gaining an average 1.89% in the week leading up to the election.
Here is a 5 day “intraday” chart of the S&P 500 via Doug Short. Weak sauce all week, complete with Lucy pulling the football away from Charlie Brown mid day Friday.
The week ahead…
All eyes will be on Tuesday’s election.
Outside of that with the bulk of S&P 500 earnings out of the way, you will see some smaller to medium companies reporting. Economic data can be ignored this week as the vast majority of market moving items happen in the first week of the month. I suppose by Thursday morning the obsession with a December rate hike will return as many of the Fed heads will be out giving speeches. Oh joy!
Please note the market enters the week VERY oversold. Conditions are there for a bit of a snap back rally.
Short term: After battling to hang in with May 2015 highs for weeks, the bears won out, with the S&P 500 trailing off to the 200 day moving average. Continue to note the shape of the 50 day moving average which is downward sloping for the first time since February. The NASDAQ had been the better performing index for many months but it is not immune when selling picks up.
The Russell 2000 broke the key 1200 level the week prior to last. We cited that as a negative. This week was obviously not rainbows and unicorns either.
The NYSE McClellan Oscillator was heavy in the red all week. Friday’s employment report was all set for a “buy the news” reaction as this indicator was deeply oversold, but that rally was snuffed out. Still this is a dangerous spot for bears in the very near term as you often get the rubber band being snapped back when it gets pulled too tightly.
Long term: Clear near term downtrend in the S&P 500 with a clear break of May 2015 highs this past week. Interesting to see this upper blue trend line on the NASDAQ chart get violated quite easily late in the week.
Charts of interest:
The U.S. dollar hasn’t enjoyed the doubt about a Clinton win.
Volatility spiked as well late this week.
Remember in September when OPEC promised it was was going to cut production by 3%? Not so much.
“OPEC is not operating as a united entity and it is no longer a big enough influencer in the market. So, people are now questioning the initial exuberance that they might come to an agreement next month,” said Ian Winer, director of equity trading at Wedbush Securities.
We haven’t talked about this one in a while but very troubled Valeant Pharma (VRX) was back in the news as it tumbled Monday following a report of a Department of Justice criminal probe of the drug maker’s top execs. Then a massive rally Tuesday on news it could sell off part of its business.
Tuesday’s one-day jump for Valeant was the largest one day percentage surge in the stock based on available data going back to 1994, according to WSJ Market Data Group.
Then sadness returned.
Speaking of troubled companies, Lumber Liquidators (LL) which had a very rough 2015 but had put in a decent recovery in latter 2016 fell sharply Monday after the company reported a worse-than-expected loss for its third quarter. Right back to the 200 day moving average for LL.
Facebook (FB) broke down post earnings as it’s forecast was not up to snuff. The the social-media giant warned late Wednesday that growth rates for its advertising revenue will “come down meaningfully.” Nothing grows to the sky of course.
Shield the children’s eyes. Fitbit (FIT) plunged nearly 34% Thursday after results and outlook came in below Wall Street’s expectations
Have a great week and we’ll see you back here next Sunday!