By Pete Biebel, Senior Vice President

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Two significant news events resulted in stocks having their worst week of the year.  The first half of the week was fairly quiet with a slight negative bias.  Neither the S&P 500 Index (SPX) nor the NASDAQ Composite Index (COMP) were able to improve upon their record highs of the previous Friday.  Everyone was waiting on the midweek Fed announcement.  The double-barreled blast of bad news hit on Wednesday and Thursday.  The second half of the week saw the biggest spike in volatility in three months.  For the week, SPX lost a little more than 3% and COMP lost nearly 4%.

Fed Chairman Powell surprised the markets on Wednesday when he indicated that the just announced rate cut might be a one-and-done.  The markets had priced-in expectations for multiple more cuts over the next six months.  The reaction in stocks was an air-pocket decline over the next 30 minutes.  The major averages all quickly fell by about 1 ½% before recovering about half of the losses late in the session.  So, the big Wednesday news, which the market had been anticipating for weeks, was a major disappointment.

The market attempted to recover Thursday morning and had recouped most of Wednesday’s loss when it suddenly got “tariff-ied.”  Just after midday, news of a threat by President Trump to impose new tariffs on China pulled the rug out from under the market.  Many believe that it was the President’s way of signaling his disappointment with Chairman Powell’s announcement.  Within just fifteen minutes, the major averages were all back in the red for the day.  Within an hour, the Dow was down more than 250 points.  Unlike Wednesday, the averages finished near their lows on Thursday.  They gapped down again on Friday morning and traded deeply in the red all day.  Only a late day rally kept the averages from closing at their lows of the week.

The obvious question now is, “Is the worst of the decline over, or is there more to come?”  One favorable factor is that SPX, despite trading below its 50-day moving average for much of the day on Friday, managed to end the week several points above that level.  Unfortunately, there are several other factors that suggest the weeks ahead are more likely to have a negative bias.

My contention since early-spring was that there wasn’t a lot more upside potential in stocks. In my April 29th blog, “Take Me Out to the Ballgame,” I wrote, ‘Still, now may not be the most appropriate time to swing for the fences.  My guess is that, at best, SPX might get up into the ballpark of the 3025 level in the coming month or two.”  I have continued to reference that 3025 level as a potential upside target for the three months since then.  The fact that last week’s losses followed immediately after SPX’s record close at 3025-and-change on the previous Friday adds significance to last week’s meltdown.

Five of the eleven S&P sectors, which had been trading above their 50-day averages, dropped below them in the last week or two.  Two other sectors, Financials and Utilities ended the week right at their 50-day averages.  That leaves just four sectors (Communication Services, Consumer Staples, Real Estate and Technology) that are still above their 50-day moving averages.

I have suggested watching small-cap stocks as an indicator of the overall market’s trajectory.  Small-caps, as measured by the Russell 2000 Index (RUT), have been lagging their larger-cap peers over the past few months.  RUT had just begun showing signs of life over the last couple weeks but cratered with the rest of the market last week.  For the week, RUT lost 2.75% and ended the week below its 50-day moving average and just 1% above its 200-day moving average.

For the past several weeks I wrote that modest pullbacks were to be expected, but that falling below 2950 on SPX would be a concern.  The 2950 level held several times on Thursday afternoon, but SPX gapped below that level on Friday’s opening and stayed below it all day.  SPX ended last week just above 2932, so just an increase of a little more than one-half percent would put SPX back above 2950.  If that feat can be accomplished in just the next few days, it would greatly dampen the negative bias of last week’s action.

Instead, if this week brings more downside, the 2900 area on SPX will be the first key level.  Sustained trading below 2900 would greatly increase the level of bearishness that last week’s slide generated.  Falling below 2875 would drop SPX to its lowest level in three months.  Doing so would suggest that the July 26th high on COMP and SPX was at least an intermediate-term high and might turn out to be the high of the year.

There’s not much to chew on in this week’s economic report calendar.  The menu of earnings reports will provide dozens of tasty offerings to spice up the market opening through the week.  The first half of the week will also enjoy speeches from a Fed governor and two regional Fed presidents.  With the market still working to digest last week’s Fed announcement, traders will be closely monitoring those speeches in the hopes of hearing something they can sink their teeth into.

Date Report Previous Consensus
Monday 8/5/2019 ISM Non-Manufacturing Index 55.1  55.5
PMI Services Index 51.5 52.2
Tuesday 8/6/2019 JOLTS Job Openings 7.323mm  7.293mm
Thursday 8/8/2019 Jobless Claims 215K 215K
Friday 8/9/2019 Producer Price Index-Final Demand, M/M +0.1%  +0.2%
PPI-FD, less Food & Energy, M/M +0.3%  +0.2%

 

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