The tape remains very split but is getting weaker. This was the 8th consecutive week that the S&P 500 and Dow Jones Industrial average closed below their respective 50 DMA lines. More worrisome for the bulls, the Russell 2000 broke below the neckline of a big double top pattern (see annotated chart). Meanwhile, the Nasdaq and Nasdaq 100, which were fighting to stay above that important area of support, broke and closed below it last week. The next level of important support to watch is October’s low. If that level breaks the next level to watch is the longer term 200 DMA line for the major indices.
We do want to note that since February whenever the market looks weak, the bullish pixie dust shows up and the major indices rip higher. Since Sep 9th, the bullish pixie dust has not been as strong. Additionally, more and more sectors are rolling over with leadership continuing to narrow. Semiconductors are strong and so are some big cap tech stocks. Amazon, a strong leader in 2016, gapped down after reporting earnings on Friday – another leader to bite the dust.
So far, breakouts have been few and far between with fewer and fewer new areas emerging in a clear leadership position. Additionally, earnings are not great and economic data is not exciting. GDP came in at 2.9% on Friday, beating estimates for 2.5%. Barring a huge sell off, the Fed will likely raise rates in December. The only way that will change is if Hillary surges in the polls before the Fed meeting this Wednesday – which is doubtful considering she gapped down after the latest FBI announcement. Now that Hillary gapped down, we expect the Fed to kick the can until December and blame the “data.” Of course, if Oct’s lows are breached, the bullish case will be over in the short term. On the other hand, resistance is the 50 DMA line and then 2016’s high for the major indices. A strong defensive stance is paramount at this juncture.
A Closer Look at What Happened Last Week…
Stocks rallied on Monday as investors digested the latest round of mixed earnings data and another mega-merger between AT&T & Time Warner. Over the weekend, AT&T (T) reached a deal to acquire Time Warner (TWC) for more than $85 billion, or $107.50 per share. The deal is made possible by easy money from the Fed and other central banks and will likely face a lot of regulatory scrutiny. In other news, shares of T-Mobile (TMUS) surged after the company reported earnings. Elsewhere, oil prices fell after Iraq said it would not join OPEC in cutting production. This put pressure on a slew of energy stocks.
Stocks slid on Tuesday as investors digested a slew of earnings data. Consumer stocks fell hard, especially stocks that depend on people buying things for their home after reporting disappointing earnings. Sherwin-Williams (SHW), Whirlpool (WHR) and Masco (MAS), were some of the stocks that fell hard on Tuesday. On the economic front, consumer confidence came in at 98.6, missing the Street’s forecast of 101.5. Meanwhile, U.S. home prices edged higher in August from July, with the S&P CoreLogic Case-Shiller 20-City Composite index rising by 5.1% year over year.
The major indices continue going nowhere fast as investors wait for more earnings and economic data. Stocks opened lower on Wednesday after Apple Inc (AAPL) gapped down after reporting earnings. A slew of other stocks reported earnings as well and, so far, there is a slight bias to the downside. Meaning, more stocks are falling, after reporting earnings, than rallying. Stocks turned higher after oil prices reversed on a report that showed supply tightened slightly. Economic data was mixed. Mortgage applications slid -4.1% last week, even though mortgage rates slid. The October services PMI index rose to 54.8 higher than the last reading of 52.3. Meanwhile, new home sales rose by 3.1% to 593k last month. The Fed’s will end its next meeting on Wednesday Nov 2nd.
Thur & Fri Action:
Stocks opened higher but closed lower on Thursday as investors digested the latest round of economic and earnings data. It was another busy day for earnings with shares of Service Now (NOW), Twitter (TWTR) and Tesla (TSLA) among the companies that rallied after reporting numbers while shares of Lending Tree (TREE), O’Reilly Automotive Inc (ORLY, and GNC (GNC) fell after reporting earnings. Economic data was also mixed. Before the open, Durable Goods fell -0.1%, missing estimates for +0.2%. Jobless claims came in at 258k, compared to the Street’s estimate for 255k. Meanwhile, Pending Home Sales grew by +1.5%, beating estimates for +1.0%. Elsewhere, sovereign bonds fell around the globe. After Thursday’s close Amazon (AMZN) gapped down after reporting earnings while Alphabet (Google) edged higher. Before Friday’s open, the government said GDP rose by 2.9% in Q3, beating estimates for 2.5%. Stocks opened higher but sold off after the FBI said new emails surfaced in the Hillary investigation.
Market Outlook: Tape Is Getting Weaker
The tape remains very split but weakened considerably in recent weeks. The fundamental driver continues to be easy money from global central banks but the law of diminishing returns may be setting in. Economic and earnings data remain mixed at best which means easy money is here to stay. As always, keep your losses small and never argue with the tape.