By Pete Biebel, Vice President
We’re coming into a make-it-or-break-it week for the stock market. Despite the overwhelming optimism for a year-end rally, market action over the past month has been lackluster. In my 11/25 comment, “Take the Points,” I urged readers to be suspicious of the extreme bullishness of sentiment: “Doubt the masses. Fade the optimism. Prepare to make year-end adjustments.” On the preceding Friday (11/22), the S&P 500 Index had closed at 1804.76, a new high. In the three weeks since then, the Index has been unable to make any significant progress higher. Even the big, employment-news inspired rally on Friday, 12/6, just got the Index back to 1805.09.
Last week I wrote, “Gotta go now,” based on my feeling that the market had dawdled enough, that its underpinnings had deteriorated, and that if we were to have higher highs, then we’d need to get going soon. Unfortunately, the small gain last Monday was crushed by significant losses over the next three days and the Index finished at its lowest weekly close in five weeks. Fortunately, the decline in the S&P held at support in the 1775 – 1780 area. The market sustained damage, but, so far, it’s repairable.
Even more fortunately, a potentially saving divine intervention looms midweek. The much anticipated announcement from the Federal Open Market Committee with respect to their ongoing program of Quantitative Easing, will be released Wednesday afternoon. The market needs resuscitation, and soon; the Fed announcement could be a breath of life for stocks. To twist a line delivered by Hans Gruber in the movie Die Hard, “You asked for a miracle, I give you the FOMC.”
Until very recently, the market expected the Fed to hold off on reducing QE until early next year. Now, improving employment data has reintroduced the possibility of a decision to taper at this week’s meeting. Analysts wouldn’t be surprised by a small reduction in the size of the Fed’s monthly purchases combined with steps to strengthen the Fed’s “forward guidance.” That could take the form of a reduced unemployment rate threshold or the introduction of other concocted quantitative criteria.
An announcement of a Fed decision in line with expectations, or no taper at all, would probably launch the averages higher, restoring the chances for additional upside progress. The recent high on SPX was just over 1813. Climbing through that level would establish a new target in the 1825 – 1840 range.
To keep the hopes alive for a miracle save, the broad averages need to avoid significant additional losses. Although it’s not unusual for the market to have a life-threatening shake-out before climbing to new highs, dropping below 1760 (on SPX) would put the market in critical condition. Dropping below 1740 could be the equivalent of Herr Gruber’s final scene in the movie.
On recent FOMC Wednesdays, market activity narrowed into a tight sideways range in the hours leading up to the 2:00 EST announcement, it then had an explosion of volatility beginning exactly at the top of the hour. That activity often included large back-and-forth whipsaws: a steep rally followed by a violent sell-off followed by another rally. On the Dow, these were often triple-digit swings. Expect more of the same this week. Friday’s “quadruple-witching” futures and options expiration will probably seem dull by comparison, but it will likely be one of the highest volume days of the year.
Three major economic reports are due in the days leading up to the FOMC announcement. Today features Industrial Production; analysts expect November to show a 0.6% gain following October’s 0.1% decline. CPI is due to be reported on Tuesday. CPI for October was down 0.1% largely due to a decline in energy prices; the core rate (ex-food & energy) was up 0.1%. The consensus for November is for overall CPI to be unchanged and for the core rate to again show a 0.1% increase. Wednesday morning will see the first update on Housing Starts since the partial government shutdown. Three months of data will be reported with expectations increasing from 910k annual rate in September to 935k in October and 952k in November.
A trinity of additional reports will be released on Thursday morning. Initial Jobless Claims should come in near a more normal 337k following last week’s surprising total of 368k. The Philly Fed’s report on general business conditions is expected to rebound to a survey level of 10 after back-to-back declines dropped it to 6.5 in November. Existing Home Sales are likely to dip again, but still hold above the 5 million annual units rate. The consensus is for a decline to 5.02 million annual sales from 5.12 in October.
The final big report of the week will be Friday’s updated estimate of third quarter GDP. No surprises are anticipated here. The estimate of third quarter growth (annualized) will probably hold near the previous estimate of +3.6%.