By Pete Biebel, Senior Vice PresidentPrint This Post
After displaying peak health coming into and through the month of August, stocks started to look a little peaked through the first several weeks of September. The market’s health was in question again when stocks resumed trading last Monday. Following three consecutive weekly losses, last week began with the major averages plunging below their lows of the prior week in the first minutes of trading. Reports of increasing COVID infections in many countries and a lack of progress on a new stimulus package in Congress were blamed for the weakness. Thankfully, Fed Chairman Powell’s testimony on Tuesday and Wednesday was just what the doctor ordered, and stocks recovered much of Monday’s loss by midweek.
A relapse of weakness in some of the mega-cap tech stocks dragged the averages lower later in Wednesday’s session, then poorer than expected data on Initial Unemployment Claims and Continuing Claims on Thursday morning dropped the averages to new lows for the week. Just when it looked as though the patient might take a turn for the worse, a late-Friday rebound erased much of the week’s prior losses and lifted the NASDAQ Composite Index (COMP) to a small net gain for the week. The S&P 500 Index (SPX) slipped 0.63% for the week while the Dow Jones Industrial Average (DJIA) lost 1.75%.
Like many doctor jokes, last week’s market action included a dose of good news/bad news irony. For instance, the bad news is that most stocks lost ground last week; there were four times more declining issues on the NYSE than gainers. The good news, however, is that it was actually a constructive week for the market; selling was intense at times, but the averages held at key support levels. In another bit of bad news, both COMP and SPX, after registering new highs early in September, fell below their August lows temporarily last week. That means September has a reasonable possibility of becoming a “key reversal” month. The good news is that Friday’s rebound enabled those indices to ignore that diagnosis and climb back up to near their 50-day moving averages. And, while the rebound in the mega-cap tech stocks is certainly good news, that optimism may be tempered a bit by the deterioration in sectors like small-cap stocks and junk bonds.
Through the month of August, my articles repeatedly warned of rich valuations, extended conditions and speculative excess all of which suggested that some sort of timeout was due. So, while it might be bad news that the averages have given back some of the previous five months’ gains, the good news is that, so far, there’s nothing to indicate that the current timeout is a top-out. The same can be said for the three sectors that led the market higher through the summer: Communications Services, Consumer Discretionary and Technology. These sectors all had double-digit declines over the past several weeks, but so far, they’ve given back only a small portion of their five-month rally. And, last week, those three were among the top four best performing U.S. equity sectors.
While the stock market might not need a doctor, the precious metals market probably ought to have a physician standing by. Gold and silver both rallied steeply for the first half of the year into their early-August highs. But, their early-year glow has paled considerably over the past two months. Both metals have given back a little more than a third of their March/August rally, and both spent all of last week below their 50-day moving averages. They’ll need to find short-term lows soon if they want to maintain hope for rekindling their recent uptrends.
A big part of the weakness in precious metals recently has been due to strength in the U.S. Dollar, just as it was Dollar- weakness that helped lift metal prices earlier in the summer. The Wall Street Journal U.S. Dollar Index fell from just above 100 in mid-May to just above 92 by mid-August. In just the past week, the index recovered more than half that loss. That Dollar strength has also weighed on crude oil prices in recent weeks and has contributed to weakness in Energy sector stocks. The sector tanked more than 10% last week and is down nearly 50% year-to-date.
Both COMP and SPX spent all of last week below their 50-day moving averages. This is the first instance of trading below the 50-days since climbing above them in April. With Friday’s rebound, those indices are just a percent or two below their 50-day averages. If they can climb back above their respective 50-day averages, it would be a shot in the arm for the market.
A few weeks ago, I suggested that one short-term technical factor to watch was the 20-day moving averages on COMP and SPX. Both indices fell below those levels in early-September, and, although they’ve made a few attempts to push back above those averages, both COMP and SPX have spent the past three weeks below them. From current levels they would each need to rally about 3% to reclaim those moving averages, but if they can pull off that feat, we’ll know that they’ll be back on their feet after their September timeout.
The most critical downside levels to watch for the major indices are their lows last week. Falling below those levels would likely trigger an acceleratioin downward. The market may not currently be in the need of medical attention, but if the averages take out last week’s lows, it could trigger a Code Blue.
Both the month of September and the third calendar quarter end later this week. Among other things, that means that a brand-new earnings season will be ramping up in just a few weeks. It also means that Election Day is less than 40 days from now. Until then, there’s a long list of economic reports this week. The market will also be closely watching for any significant changes in the number of daily new COVID infections in the country, and for any progress in Washington on a new stimulus bill. One other potential catalyst that could generate a market impact is the first of the three scheduled Trump/Biden debates tomorrow evening.
|Monday 9/28/2020||Dallas Fed Manufacturing Survey, September||8.0||8.5|
|Tuesday 9/29/2020||U.S. Goods Trade Deficit, August||$79.3B||$82.6B|
|Wholesale Inventories, August, M/M||-0.1%||-0.1%|
|Case-Shiller House Price Index, July, M/M||0.0%||+0.2%|
|Consumer Confidence, September||84.8||88.8|
|Wednesday 9/30/2020||ADP Employment Report, September||428K||650K|
|Q2 Gross Domestic Product, Q/Q, SAAR||-31.7%||-31.7%|
|Chicago PMI, September||51.2||52.1|
|Pending Home Sales, August, M/M||+5.9%||+3.1%|
|Thursday 10/1/2020||Initial Jobless Claims||870K||850K|
|Personal Income & Outlays, Income, August, M/M||+0.40%||-2.50%|
|Personal Income & Outlays, Spending, M/M||+1.9%||+0.8%|
|PMI Manufacturing Index||53.5||53.5|
|ISM Manufacturing Index, September||56.0||56.0|
|Construction Spending, August, M/M||+0.10%||+0.70%|
|Friday 10/2/2020||Employment Situation, Non-Farm Payrolls||+1,027K||+1,032K|
|Factory Orders, August, M/M||+6.4%||+1.5%|
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.