I am a Grampa! Charli Louise Kenny arrived this past Thursday evening. Everyone is home, happy and healthy.
Current Market Outlook: Market in correction
US equity markets quietly slipped into correction territory last week on anemic volume following the previous week’s triple witching. Friday’s rebound in equity market prices allowed for all four major market indices to escape the trading week without posting a capitulation trade lower. If a capitulation trade had emerged, it would have marked another meaningful leg lower in prices and a step closer to targets outlined in last week’s note.
For the week:
DJIA: – 483.46 pts. or -1.75%
S&P: – 21.01 pts. or -0.63%
Nasdaq: +120.28 pts or -1.11%
Russell 2K: -61.87 pts or – 4.03%
Friday’s trade was most welcome, as longs were thrown a life-line.
On the day:
DJIA: +358,52 or +1.34%
S&P: +51.87 or +1.60%
Nasdaq: +241.30 or +2.26%
Russell 2K: +23.09 or +1.59%
Sector performances for 9/25-click to view-below:
(courtesy Bloomberg)
The rebound in information technology was the driving force behind the Nasdaq’s sharp reversal and trade higher on Friday. The A/D metrics for the session were constructive. It would have been significantly more meaningful if the volume had risen in lockstep with prices. That was not the case. On Friday, the volume on the NYSE slipped 16.23% and volume on the Nasdaq fell 7.25% relative to Thursday.
Using the S&P 500 chart below as a proxy for the broader market, two things are immediately evident. First: markets lost ground on the week, but only marginally so, effectively forestalling a test at the 200 DMA, which remains a potentiality. Second: the volume was unimpressive. The lack of volume, given the discount that has been priced in at these levels, is a bit of a concern. It is entirely possible that the lack of volume may well have more to do with the calendar than anything else, however, as in the aforementioned quarter-end.
We close out Q3 this week, and as a result, should see some quarter-end window dressing. Given the lack of conviction evident in last week’s trade, I suspect that if window dressing does emerge, it will not alter our current outlook much.
Last week’s economic calendar highlights:
Existing home sales for the month of August solidly beat consensus. The actual reading for the month, annualized, was 6.000 M. Econoday consensus was 5.965 M and July’s reading was 5.860 M. July’s M/M reading was an astounding 24.7%. August’s reading was 2.4%. Y/Y, existing home sales have risen by 10.5%. Fed Chairman Jerome Powell’s speech underscored the uncertain nature of where we are as a nation in terms of any sort of recovery in a potentially post-COVID world. Also, as expected, Powell underscored the Fed’s commitment to using all available tools to stimulate the economy.
On Wednesday, we received the PMI Composite Flash reading for September. The topline reading was 54.4 versus August’s 54.7. The manufacturing vertical came in at 53.5 for the month, and the services vertical came in at 54.6 – both in line with previous readings and with expectations. Fed Chair Powell made it clear that the Fed’s tools, in terms of monetary policy, are limited and that our economy is in need of additional fiscal stimulus.
The only economic data release of significant consequence on Friday was the Durable Goods Orders data for August. This report added additional concern for those looking for acceleration in economic velocity. For the month, the reading came in at 0.4% — down significantly from July’s 11.7% reading. Ex-Transport and Core-Capital goods M/M was unimpressive: 0.4% and 1.8%, respectively.
This week is very busy with economic calendar highlights as we close the books on Q3 and open them up for the last quarter of 2020. Can you believe it?
The census bureau releases an advance report of US trade in goods and services every month. For the month of August, the gap in goods trade is expected to jump to $-82.6 B from the previous month’s $-79.3 B. Next week we receive the combined monthly total for goods and services. Econoday consensus for that release stands at $-63.6 B. Given the unprecedented level of federal government deficit spending, many are expecting the US dollar to weaken, as I have suggested in recent months. My suspicion is that President Trump looks at that consequence of massive deficit spending as a net benefit in regards to trade and our trade deficit specifically. The Conference Board releases its widely-followed Consumer Confidence Index on Tuesday at 10:00 am. This week’s reading is for September. The August reading was 84.8. September’s reading is expected to tick modestly higher as the country continues to open back up in fits and starts. Econoday consensus is 88.8.
The final reading for Q2’s Gross Domestic Product (GDP) is released on Wednesday morning. The prior reading for Q2 was -31.7%. That will not change with this release.
The Weekly Jobless Claims data for the week ending 9/26 is out Thursday morning. Econoday consensus for initial claims is 853 K. This data point needs to start reflecting significantly better results and soon. Otherwise, we may well have a second contraction on our hands in the near term. Personal income and outlays are out at 8:30 am. Topline M/M personal income is expected to contract -2.5% and M/M consumption is expected to tick down to 0.8%. ISM Manufacturing Index reading for September is expected to match August’s reading of 56.
On Friday morning we receive the September Employment Report. Econoday consensus is:
Nonfarm Payrolls: M/M: 900,000
Unemployment Rate: 8.2%
Private Payrolls: 900,000
Manufacturing Payrolls: 33,000
Labor Force P.R.: 61.8%
Avg. Hourly Earnings: Y/Y 4.7%
As evidenced by recent weekly jobless claims data, I suspect we will continue to see most broad measures of post-COVID19 economic on the wane – losing velocity. The lack of follow through on the latest proposed consumer and main street assistance from Congress is beginning to manifest in the data.
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