By Pete Biebel, Vice President
After getting off to a rocky start, stocks turned in a pretty respectable performance for the week. For the fifth time in the last seven weeks, the broad averages finished very near their highs of the week. The major averages all posted small gains for the week. The S&P 500 Index (SPX) closed above 1800 for the first time ever. Five of the nine S&P sectors that I track were down for the week, led by Utilities (-1.75%) and Technology (-0.52%); the biggest gainers were Financials (+1.71%) and Healthcare (+1.69%). Worth noting with respect to the technology sector is the suddenly poor performance of some of that sector’s recent darlings.
The “No Sellin’ Yellen” chant is reaching a fevered pitch; everybody seems to expect that the market will continue to rally into year-end. The prevailing sentiment in the stock market is reminiscent of the cocky confidence a heavily favored team feels heading into a game against a cupcake opponent. What could possibly go wrong? Have you noticed how many times the team that’s expected to win by a huge point-spread disappoints their fans?
Excessive optimism is a reliable indicator of pending disappointment even more so in the stock market than in professional sports. The seeming bullish ebullience of the masses, with everyone expecting the market to continue to rally through the end of the year, should be a warning sign. Given this condition, even longer-term investors might want to prepare for a let-down. One proactive step would be to consider some timely, year-end portfolio rebalancing.
The equity slice of your portfolio has had a very good year. The likelihood of another 25+% gain in 2014 is pretty slim. As the year-end, no-taper, gotta-buy-stocks enthusiasm fattens the market’s 2013 gains, you might want to take the opportunity to lighten-up a skosh in those sectors with the biggest gains (and hence which are now over-weighted), and redeploy that capital into sectors that didn’t fare quite so well (and hence which are now under-weighted). In tax-deferred accounts, those adjustments could be made at the first sign of trouble coming into year-end. In taxable accounts, where investors will be holding their breath, hoping to carry big gains into 2014, adjustments might be in order prior to year-end if signs of a reversal become evident.
SPX stalled at the 1800 level last Monday morning. The early-week pullbacks, on Monday and Wednesday, saw SPX testing support in the mid-1770s. That retrenchment gave the index a running start to approach the 1800 barrier on Thursday and to clear that level on Friday. If the year-end rally optimism is, in fact, well founded, then SPX and the other broad averages should be able to easily extend on those late-week rallies. Given the mood and the recent gains, the averages should enjoy easy gains in this holiday week. However, if SPX were to somehow drop below 1795, then be on guard. If SPX were to decline further, below the 1775 level, then all bets are off; the odds-on favorite is not going to cover.
This week’s big economic reports will provide updates on Housing Starts, Durable Goods Orders and Jobless Claims. As you may have logically surmised, even reports of this magnitude will likely, in this week of family festivities and football, be just a few more ephemeral noises amidst the pre-holiday din.
Tuesday’s Housing Starts report is expected to show a small increase to 903k annual units in the month of September, up from the August pace of 891k annual units. The Durable Goods Orders release on Wednesday should provide a hint on the health of the country’s manufacturing sector. Orders in September were up 3.7 percent solely on a jump in aircraft orders. Ex-transportation orders in September were down 0.1%. Analysts expect October Durable Goods Orders to decline 2.0%, as Transportation orders ebb, but expect Orders ex-Transportation to actually increase by 0.4%.
Jobless Claims for last week will also be reported Thursday morning. The consensus is for 330k new claims last week, a bump up from the surprisingly low 323k reported for the previous week. Even with a small increase, a number anywhere near the consensus will still be below the four-week moving average of new claims, which currently stands at 338.5k.
Doubt the masses. Fade the optimism. Prepare to make year-end adjustments.