While Rome Burns & The “January Effect”

There is a growing chorus of highly respected market technicians calling for a pullback in the market. Using the Nasdaq Composite as a proxy for the broader market, it is not difficult to see why. The Nasdaq Composite pierced and closed above the 12,000 level only once in its history, on August 2 of this year. On two subsequent assaults on the 12,00 level the Nasdaq Composite has only traded above the 12,00 level, on October 12th, and on that day it was unable to close above the 12,000 level. It has recently been flirting with the 12,000 for much of November. My sense is that we trade above the 12,000 level before year-end. A continuation of stronger than expected earnings, the “January Effect”, advances in the vaccine narrative, and momentum should all work in concert to lift markets into year-end.

The January Effect phenomena coined by investment banker Sidney Wachtel  in 1942 has been challenged by market efficiency Investopedia

It was a mixed week for US equities last week. The Dow Industrials lost 216.33 points or 0.73% while the S&P 500 also lost ground on the week, giving up 27.61 points or 0.77%. However, both the Nasdaq and Russell 2K modestly added to recent gains. The Nasdaq added 25.68 points or 0.22% last week. The Russell 2K added 41.30 points or 2.37% for the week.

Thanksgiving week normally translates into lower volume as traders often take this shortened week off. However, we have a very busy economic calendar as well as a jam-packed earnings calendar. The economic calendar and highlights are outlined below. As far as earnings are concerned, we hear from key retailers like Best Buy, Dollar Tree, Dick’s Sporting Goods, Foot Locker, and more but we also hear from some tech favorites like Analog Devices and Autodesk. Finally, given all the news that keeps popping up with pharmaceutical names concerning the COVID-19 pandemic, there will undoubtedly be additional pockets of volatility. In short, though it is a holiday-shortened week, there is plenty for us to keep an eye on – plenty.

Last week’s economic calendar highlights

Retail sales for October were weaker than expected. On a M/M basis, retails sales were 0.3% versus consensus of 0.4% and the prior month’s revised reading of 1.6%. Topline Industrial Production for the month of October was 1.1% – a significant improvement over September’s revised -0.4%. Importantly, manufacturing output on a M/M basis was a solid 1%. Capacity Utilization rose to 72.8%. Housing starts and permits both rose again in October. They were 1.530 M and 1.545 M respectively. Weekly Jobless Claims disappointed the street. For the week ending 11/14, claims rose 742 K versus consensus that had been calling for 710 K. The claims data threw a wet blanket on the market for several reasons. It worse than expected, it was the first reversal higher in weeks and it fueled the narrative that clearly claims that Main Street needs more help, and sooner rather than later. The Philadelphia Fed Manufacturing Index for November was stronger than anticipated. It came in at 26.3 versus Econoday consensus of 24.5.

This week’s economic calendar highlights:

Due primarily to Thanksgiving on Thursday, this week’s economic calendar is front-end loaded with Wednesday being the busiest day of the week in terms of our economic calendar.

On Monday, we receive the Purchasing Manager’s Index (PMI) reading for November. Econoday consensus is calling for the composite reading to remain unchanged from October, 55.6. The Manufacturing and Services verticals of the report are expected to follow suit.

The Conference Board’s Consumer Confidence reading for November is due out Tuesday morning. October’s reading was 100.9, and November’s reading is expected to tick fractionally lower to 98.

Durable Goods Orders, New Orders M/M, for October expected to drop 1% from September’s 1.9% to 0.9%. The Q/Q GDP reading at an annualized rate for Q3 is expected to match the prior reading. Personal Consumption Expenditures are expected to come in at 40.8%. International Trade in goods (advance) is expected to tick modestly deeper to $-80.8 B from the previous month’s reading of $-79.4 B. Weekly Jobless Claims for the week ending 11/21 are out on Wednesday at 8:30 am. Last week’s figures matched the four-week moving average, 742 K.

New Home Sales for October are out Wednesday at 10:00 am. Econoday consensus stands at 970 K for the month. September’s New Home Sales were 959 K. Personal income and outlays data for October are due out Wednesday. Income is expected to flatten (0.1%). Personal consumption is expected to drop to 0.4% from the previous month’s reading of 1.4% on a M/M basis. By nearly every measure this report should reflect is slowing economy.

Consensus is expecting the economy to have weakened further in September and October. By most measures, one could surmise that the gains that materialized after the first round of COVID-19 stimulus hit the market has waned. If the market is treading water in hopes of receiving additional aid from Washington DC, the market may be treading water in vain.

Once again, Washington D.C. has become the focal point for investors and not in a constructive way. The dysfunction, political backsliding, inability to focus on anything other than parochial politics is difficult to understand.

Flickr Photo: NYSE 1938 printed flyer to encourage World’s Fair visitors to come have a look around. By Cowtools

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