The first leg of the market correction is in the books, with a number of major indexes across multiple asset classes at important support or resistance levels. Now as we are head into the final run toward year end, will the markets stabilize and resume their trends, or break down further? Let's see if the data provide any insights.
Stocks: Last week was a one difficult week for the U.S. equity market. Monday opened with a strong move down, taking the S&P 500 and Dow Industrials, which had come into the week resting against their 50 day moving averages, crashing down through those levels. The NASDAQ and Russell 2000, which had already broken the 50, moved down toward their 200 day MAs. On the week, the S&P and Dow dropped well over 1%, the Russell a bit less. The NASDAQ, which has been leading the market down just as it led the market up off the June bottom, fared the best, but traded below the 200 day on Friday, before rally to finish above it at the close.
S&P sectors were all in the red for the week. The heaviest damage came in the materials (off 2.8%), energy (2.4%), and financials (2%). Only health care and tech, which has already taken some heavy hits, finished the week with losses smaller than 1%. Among the nine major sectors, only tech has violated the 200 day MA. Even the utilities, which had been enjoying something of a bounce in recent weeks, pulled back sharply.
The equity market pressure was global; eleven of the twelve major foreign indexes we follow posted losses - and the twelfth, Hong Kong's Hang Seng, gained by the slimmest of margins. Some of the larger emerging markets, which had been showing promising signs of strength, saw significant profit taking. The Shanghai Composite, a long time laggard, had in recent weeks finally pushed back above 2,100 and the 50 day. Friday's selling pressure took it back down below both levels.
Bonds: U.S. treasury yields again saw choppy action. Thursday's release of initial Q3 GDP, which surprised to the upside, saw yields spike; the long bond very briefly traded at 3%. By Friday, when the market had time to digest the internals of the GDP report (more on this below), yields fell back, finishing the week with a net drop. The five and ten year notes and the thirty year bond all ended with yields below their 200 day MAs. Corporate bonds, on the other hand, saw yields rise broadly across a number of grades and maturities. TIPS and municipal yields also rose on the week.
Commodities: Oil fell nearly 5% on the week, the WTI benchmark crude closing at $86.24. Natural gas, which had been consolidating around $3.60, popped above $3.80 on Thursday before settling at $3.72. Gold fell below the 50 day but held support above $1,700. Silver similarly broke the 50 day and is trying to hold $32. Copper violated both the 50 and 200 day, and has come back to support at the previous resistance level of $3.55. The grains traded sideways with a slight downward bias. The softs pulled back more steeply, with coffee re-testing the September low.
Currencies: The U.S. dollar index pushed above the key resistance level of 80, while the euro pulled back below $1.30. Sterling bounced off the 50 day and closed back above $1.61. Yen saw very choppy action, falling back below its 200 day vs. the dollar as the Noda government announced a major new stimulus program in yet another attempt to reverse Japan's deflationary trend.
The last week saw a continuation of the run of earnings and revenue misses that have characterized this earnings season. Included among those was a rare earnings miss from Apple (NASDAQ:AAPL), which also released its much anticipated "mini" tablet to generally unenthusiastic reviews. Other tech giants also gave the market cause for concern - a big miss from Amazon (NASDAQ:AMZN), and the widely panned release of Microsoft's (NASDAQ:MSFT) newest operating system, along with its accompanying tablet. Not to be outdone, the official economic sector weighed in with an upside surprise of 2% GDP growth in Q3. However, drilling into the data, the big mover was a 13% increase in defense spending. The private sector components of GDP were nearly flat. We might mention that the FOMC held the line, to the surprise of absolutely nobody.
Stocks: Since the mid-September top have been seeing a broad and, thus far, relatively orderly pullback in the major equity indexes. The market had put together a nice run off the June bottom, and some correction would have been expected. Given the weakness of corporate earnings and revenues, and in particular the guarded outlooks from several key market leaders, the correction was all but certain. At this point it is a good idea to take stock of where we are now.
The major indexes are all at or near some key support level. The S&P 500 has found support at 1,400, a level which also was support in August when the rally paused to consolidate its gains. A move higher from here would be positive; a move lower - toward the 200 day (~1,380) would signal market weakness. The Dow Industrials are in a similar position relative to 13,000, where the 200 day is converging. The NASDAQ is already at its 200 day, as is the Russell 2000. In my view it is pretty simple. The market makes a stand right here, right now, or we could see significantly lower share prices ahead.
Bonds: We could point to one event that really tells us all we need to know about the near term outlook for the bond market. The upside GDP surprise could not produce a rise in Treasury yields for more than a day. This should comfort nervous bond and bond fund investors for a while. Corporate bonds have seen some profit taking, but it has been a long run for corporates, so this came as no real surprise. While not particularly attractive and skimpy on yields, the bond market is not about to hand investors a crushing loss. That may be down the road, but it's not around the corner. I continue to prefer corporate and municipal issues, and to avoid Treasuries.
Commodities: Oil is back into the mid $80s, a previous support/resistance level. Much like equities, it looks like it could go either way from here. Unless the dollar moves higher, I expect to see a bounce here and perhaps a test of $90, but my outlook through year end is for a largely range-bound WTI price around current levels. Gold is testing support at $1,700 and needs to hold here. If it doesn't, look for a test of the 200 day in short order, and perhaps a move down toward $1,600. Overall commodity prices look soft, with limited upside potential and significant downside risk.
Currencies: The major currencies, except yen and perhaps the loonie, all look like they are into longer term stable ranges. Given the fundamental uncertainties facing a number of economies, it is difficult to get a read here. The dollar index just topped the key resistance level of 80, but stalled right there. My suspicion is that we could see it remain in that 78 - 80 range a while longer. The euro is in the lower end of the $1.28 - $1.32 range and, so far, holding the 200 day. Yen has shown a good bit of volatility, but the dollar cross rejected 80 last week with a "bearish engulfing" candle. The Bank of Japan meets this week, and observers expect significant policy easing in the long running battle against tenacious deflationary forces, but in the short term the market seems to be expressing some doubt.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.