Weekly: Stocks rallied on Friday as central banks promise to provide liquidity as necessary

Friday, October 17, 2014 -

Stocks finished the week on Friday with a nice rebound rally from critical support levels as global dovish talk from several central banks helped calm markets from day after day of selling.

Stocks are in a minor rebound rally as we head toward the end of the month and the heavier portion of Q3 earnings season. Will it last until the November elections? Will it have any effect on the elections? Hard to say from here, but I suspect we are simply seeing a rebound leg of what will end up being a much further decline over the fourth quarter.

Typical retracement following a strong correction is around 38% to 62% – we will watch and chart this over the next few weeks into the election. The gains we are seeing are small compared to the losses experienced since the summer highs and all major indexes remain well off their mid-September highs.

Though stock prices ended the day firmly in positive territory, excepting the smallest cap stocks, the pulled back toward the close, well off their best levels of the session, still reflecting a bias toward selling into rallies. The Dow soared 263 points (+1.6%) to 16,380, the Nasdaq jumped 41 points (+1.0%) to 4,258 and the S&P 500 surged up 24 points (+1.3%) to 1,887. The NYSE finished at +1.25% while the small cap Russell 2000 showed a glaring divergence finishing at -0.35%. Microcaps finished even worse than small caps, dropping into the red and finishing at -0.94%.

Seeing high risk stocks pull back like this while the blue chips and broader market plays catch up suggests that this rally could be short-lived. Despite the recovery bounce seen in the last two sessions, the major indexes once again moved lower for the week. The Nasdaq dipped by 0.4 percent, while the Dow and the S&P 500 both fell by 1 percent, while the small cap Russell 2000 finally finished up 2.75% for the week after a solid six weeks of negative posts.

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QE to die – or not?

The rally we are seeing toward the end of this week is partly a technical bounce at critical 200MA support and partly on speculation that the Federal Reserve may delay the end of its asset purchase program following Thursday’s comments from St. Louis Fed President James Bullard.

Following a strong pull back in the stock market, Bullard suggested on Thursday that that the Fed should consider delaying the end of the program, though the Fed has previously indicated that it plans to bring its asset purchase program to a close at its next monetary policy meeting later this month.

At the other end of the scale, Boston Fed President Eric Rosengren told CNBC in an interview on Friday that the U.S. is not expected to need another round of quantitative easing but also cautioned that he couldn’t rule it out.

If the economy got weak enough that it was required, we should do it. I certainly hope and I don’t expect that will be the case, but I can’t rule anything out at this time,” Rosengren said.

And there you go . . . if the powers that be are unhappy with equity declines all they have to do is lean a little on the Federal Reserve and they will be more than happy to return to the policy of liquid accommodation and zero interest rates. But will it work again?

Housing starts rebound

In an odd bit of timing for construction, the government (Commerce Department) released a report before the start of trading showing that housing starts rebounded by more than expected in the month of September.

The report said housing starts climbed 6.3 percent to a seasonally adjusted annual rate of 1.017 million in September after tumbling 12.8 percent to a rate of 957,000 in August. Economists had expected housing starts to rise to a rate of 1.008 million.

Don’t make too much of this improved housing data. Remember, we are entering elections in November and the government is prone to pull numbers forward from future months to polish their image in hopes that incumbents will be re-elected.

And if we compare the mild bump this month it doesn’t come near to offsetting the sharp drop seen last month. If you are willing to compare housing starts to its peak in 2006 we are barely a third of those starts, suggesting that housing could improve by over 100% and sill be more than 30% below the 2006 peak.

Unexpected rise in consumer sentiment

Additionally, Reuters and the University of Michigan released a report showing an unexpected improvement in consumer sentiment in the month of October.

The report said the preliminary reading on the consumer sentiment index for October came in at 86.4 compared to the final September reading of 84.6. Economists had expected the index to edge down to a reading of 84.0.

With the unexpected increase, Reuters said the consumer sentiment index rose to its highest level since July of 2007.

Looking Ahead

Earnings news is likely to move into the spotlight next week, as the economic calendar is relatively quiet following the slew of data released over the past few days.

Apple, IBM, Coca-Cola, McDonald’s, Yahoo!, General Motors, AT&T, Amazon, and Microsoft are among the big-name companies due to report their quarterly results next week.

Nonetheless, traders are also likely to keep a close eye on reports on new and existing home sales, consumer prices, and weekly jobless claims.

Week In Review

(briefing.com): Volatility on the Rise

The stock market began the week on Monday on a defensive note despite showing some intraday strength. The S&P 500 lost 1.7% with all ten sectors ending in the red while the Russell 2000 (-0.4%) held up a bit better. Equity indices slumped in the early going amid weakness in groups that pressured the market during the prior week. However, the same areas showed some intraday strength, leading to a rebound that placed the S&P 500 back above its 200-day moving average (1905). The slim gains faded in the afternoon, which caused the S&P 500 to slide to a fresh low. All ten sectors ended lower with energy (-2.9%) registering the biggest decline. The growth-sensitive group lagged from the start with crude oil contributing to the weakness.

Equities snapped their three-day skid with small caps pacing the Tuesday rebound. The Russell 2000 jumped 1.2% while the S&P 500 added 0.2% with eight sectors ending in the green. However, the advance masked an afternoon slide from intraday highs that caused the Dow (-0.02%) to end flat. The key indices began the day with slim gains after investors received a trio of quarterly reports from the financial sector (+0.5%). Citigroup (C) was a notable standout, surging 3.2%, in reaction to its better than expected results combined with news indicating the company will exit its consumer business in 11 markets around the world. However, the broader sector could not pull away from the S&P 500 as JPMorgan Chase (JPM) and Wells Fargo (WFC) weighed. Shares of JPM lost 0.3% following a bottom-line miss while Wells Fargo fell 2.7% after reporting in-line results.

The market endured another rough session on Wednesday, but the major averages managed to climb off their worst levels ahead of the close. The S&P 500 lost 0.8% while the Russell 2000 rose 1.0% after showing relative strength throughout the session. Equity indices stumbled out of the gate to continue the weakness that started in the futures market overnight. Also weighing on sentiment was a trio of disappointing economic reports with retail sales, PPI, and the Empire Manufacturing Index all missing expectations. The data was met with dollar weakness while Treasuries soared. The 10-yr note was up more than two points at its best level of the day with the benchmark yield down 34 basis points. That represented the sharpest move since the $1 trillion QE program was unveiled in March 2009. The benchmark yield recovered the bulk of its decline into the close, ending lower by six basis points at 2.13%.

On Thursday, stocks faced another whipsaw session that ended with a flat finish for the S&P 500 while the Russell 2000 (+1.1%) registered its second consecutive advance. The price-weighted Dow was the weakest performer of the day with a loss of 0.2%. Equity indices tumbled out of the gate for the second day in a row amid broad-based selling pressure that also weighed on equities in Europe. The S&P 500 marked a session low near the 1,835 level during the first hour, but spiked more than 20 points following comments from St. Louis Fed President James Bullard. Mr. Bullard appeared on Bloomberg TV and said the Fed should consider delaying the end of its Quantitative Easing program, which is set to wind down at the October FOMC meeting. The market jumped from lows in reaction to the comments, but it is worth noting that Mr. Bullard is not a voting FOMC member this year and only an alternate voter on next year’s schedule. The non-voter status did not get in the way of a surge in equities while Minneapolis Fed President (and FOMC voter) Kocherlakota provided a similar view, saying there is more the Fed can do to achieve maximum employment.

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