At this point in January, not much is going right for the stock market. I wrote a couple of weeks ago about this week being a key "pivot point," and so far the pivot has been to the downside. Last week I wondered if this week and indeed the entire month's performance could be saved by the Fed meeting, but salvation appears to be a long shot now, despite equities being oversold and ripe for a rebound before the end of this week.
The action so far this week has certainly been revealing. For years, the stock market has been rallying into Fed meetings, and this week prices not only sold off into the statement, they stayed that way afterwards. The Fed's continuation of the taper was well telegraphed by designated Street communicator Jon Hilsenrath and in assorted governor remarks ahead of time; it couldn't have come as a surprise.
The odd thing is that the Fed is still pumping in another $65 billion next month. But the perception of indefinite extra liquidity has nonetheless changed, and that of course is making all the difference. Suddenly investors are paying attention to things that might have skipped notice before. Some of the recent economic news on the weaker side is no longer excused, or even welcomed, under the rubric of "bad news is good news." The unanimous Fed vote to continue the taper would imply that they are actually serious about going through with it.
Now the many misses and downgraded guidance from earnings season are being taken seriously as well, at least on a trading basis. HSBC's Chinese PMI survey result of below 50 (confirmed at 49.5 Wednesday night) has fueled exits from emerging markets that are straining many developing-country currencies and adding to the beating in emerging market equities this month. Such developments are drawing attention to the Fed's role as the world's putative central banker, though it isn't and shouldn't try to be. But pointing a finger at the US has always been a popular response overseas to domestic problems.
I still can't tell you whether or not the current decline is the beginning of a larger correction, because that isn't quite knowable yet. Given the peak-to-trough drop of nearly 5% on the S&P, it does suggest that the long "Sornette wave" that has been in place since November 2012 has been broken. The last two episodes of such waves breaking (by my estimation) were later followed by new highs in the market, though the old trajectory stayed lost.
In 2007, the market worked its way back to a high several months later, and indeed such lags are behind part of my thinking that the first quarter top may not yet be in. My tentative conclusion is that the beginning of a 10% correction may have indeed started, but not in the sense that the indices are going straight down by that amount. The 10% July-October correction of 1999, for example, was broken up by a 5% Fibonacci-style retracement in August.
Tuesday's durable goods report lent support to my thesis that most of the current bulge in GDP that began in the third quarter is at bottom another in a series of periodic inventory restocking episodes we have had since the recession ended. Each episode has been heralded as the long-awaited escape velocity, only to see the economy return to its "new normal" 2% growth path afterwards. Despite some of the usual attempts to position the report in a more favorable light, to my mind the 1.6% drop (ex-transportation) and downward November revision puts the lie to talk about momentum from newly confident corporate officers.
Shipments of durable goods excluding transportation rose 1.7% in 2013. Shipments in the business cap ex category, non-defense capital goods excluding aircraft, rose by 1.5%. That's about the same as the rate of inflation, or in other words, flat in unit terms, compared to a 6% rise in 2012. Some momentum. The two-year compound rate of growth in new orders fell to 3.4% (I use a two-year rate to eliminate the noise from 2012's fourth-quarter budget pause), the lowest since May 2011.
So no, I don't believe in the projections of 3% real GDP growth for 2014 that were so widespread only a couple of weeks ago. But I don't believe that that particular narrative has been entirely broken, either, and it could get a new life starting next week. It could even get a jump this week from potentially positive earnings results from Google (GOOG) and Amazon (AMZN) after Thursday's close.
For starters, the last five regional Fed surveys I've looked at - Richmond, Dallas, Kansas City, Philadelphia and New York - strongly suggest that weather did indeed play a role in December data, and that January has seen a rebound, despite the freakish cold in the Southeast this week. The surveys collectively point to a rebound in the ISM national manufacturing survey result coming up this Monday.
Second, weekly jobless claims over the first two weeks of January (the approximate sampling period for the jobs report) fell 8.6% from the comparable period in January 2013, a decline more in keeping with 2013's pattern except for one critical month - December 2013, when the combination of an ultra-late Thanksgiving holiday (they can't come any later than the 28th) and unusually cold weather led to a 5% rise in claims from the first two weeks of December 2012. I believe that badly threw off the seasonal adjustments and overstated November jobs while understating December (the unadjusted December establishment payroll estimate was well within the year's central tendency).
I wouldn't lose sleep waiting for the December job count to be rewritten back up to 200,000, but the claims data does suggest a substantial upward revision to the month could be coming a week from Friday, one that is accompanied by a January jobs number closer to the 200,000 mark. With stocks sharply oversold on a short-term basis, an apparent reversal in economic gloom could lead to a sharp equity rebound. There is also the possibility of a surprise from the Labor Department's annual benchmark revision. I wouldn't dare to guess which way the latter will go, but it could shake up the employment picture.
In the interim, keep an eye on the next Chinese manufacturing PMI due late Friday evening. It seems to be a current focal point for traders, though the impact could get offset by a decent ISM number Monday morning.
More important is where the potential bottoms of this market lie, a market which is still not oversold on a medium or long-term basis. The 15-week moving average on the S&P is only about a percent away, at about 1758, and hasn't been tested since November 2012. But neither has the 200-day exponential moving average, which is several percent lower at just over 1700. I don't think we're about to hit the latter in the next few days, but sentiment has certainly taken a hit.
A down January market is not a good sign, something you will doubtless read many times elsewhere, along with not a few explanations as to why it doesn't matter this year, or at least shouldn't. In my opinion, such an occurrence nearly five years into a bull market should be heeded. It opens the door to a more ominous event than a test of the 200-day average on the S&P, something we were overdue for anyway: The larger threat of a return to the long-term trendline from 2009, which is sitting at about 1500. I don't think we're going there this quarter, and a rebound to 1850 or higher is still in the picture. But the odds we'll be going there sometime this year have gotten a lot more convincing.