- The S&P 500 has now fallen below near term support levels and appears to be on its way to test the important 4200 level.
- Sadly, the period between Rosh Hashanah and Yom Kippur and for that matter, September itself, has lived up to its negative billing. Traders certainly sold Rosh Hashanah, will they buy Yom Kippur on Monday? Based on recent price action, maybe not just yet.
YOUR WEEKLY ROADMAP
This Friday marks the end of what is historically the weakest seasonal period of the year and traders can’t wait to get the 4th quarter started. Yet, before the curtain falls on the 3rd quarter we still have a few headwinds that could cause some angst in the market.
Sadly, the period between Rosh Hashanah and Yom Kippur and for that matter, September itself, has lived up to its negative billing. Traders certainly sold Rosh Hashanah, will they buy Yom Kippur on Monday? Based on recent price action, maybe not just yet.
A Date with 4200? The S&P 500 has now fallen below near term support levels and appears to be on its way to test the important 4200 level. Why does it feel as if we have a date with this level and why is it important? Let’s look at the chart.
Last week a key line of support was breached when we closed below the August low at 4335. The index has now made a lower low after failing to make a higher high. The near-term trend is down.
The RSI is reading 32.82. It’s the closest to being officially oversold for the first time in a year, but isn’t there just yet.
On top of those two factors and given seasonal conditions, a continued climb in rates and a breakdown in many of the largest stocks within the index, all signs point to a test of the 4200 level. That’s only another -2.7% decline and it could happen quickly. The signs point to hitting an official oversold condition, possibly a mini wash-out in price and a swift trip to the 4200.
The 4200 level is not only a former major resistance area that should now act as support, but it coincides with a rising 200-day moving average and a key Fibonacci retracement level (blue horizontal line). Technically speaking, this is a strong area where buyers should step in as we head into the 4th quarter.
Government Shutdown? The odds of this happening by month’s end seem to grow stronger each day. Many key figures in the shutdown negotiations left early for the weekend as talks stalled.
So what could this mean to the markets? Based on historic precedence, we could see a sell-off into the shutdown and a slight bounce if it happens. Thanks to my friend Sam Stovall for providing the following data.
Since 1976 there have been 20 government shutdowns. The week before the shutdown the S&P 500 has declined an average of -0.4%. On the first day of trading during a shutdown it averaged a gain off 0.1%. To paraphrase Sam, the tourists may be more affected by the government closing than the traders.
Personal Consumption Expenditures (PCE) known as the Fed’s preferred inflation measurement is expected to tick back below 4% for the first time since last September 2021 when released on Friday.
The Fed prefers this inflationary measure more than the CPI because it covers a broader range of spending. The core PCE previous reading of y-o-y 4.2% was its first uptick since May of this year. On Friday economists are expecting a drop to 3.9%.
Seeing that Jay Powell claimed the Fed will continue to be data dependent when discussing the future path of rate hikes, this number will be scrutinized under a microscope. While the PCE hasn’t moved the needle as much as the CPI in the past, given the tone of last week’s FOMC meeting, a number not inline with the 3.9% expectation could cause unexpected market gyrations.
Fed Speak. Later this week the quiet period for the Fed presidents comes to an end and they’ll begin to make the speaking rounds. The big event is when Jerome Powell speaks and takes questions in Washington DC at a teacher town hall meeting after the close of the markets on Thursday.
United Auto Workers strike against automakers Ford (F), General Motors (GM) and Stellantis (STLA) remains a very fluid situation. However, the impact to the stocks involved has been minimal.
Over the first week of the strike only one plant of each of the three automakers suffered shutdowns. On Friday the UAW planned to expand their walkouts at other plants at GM and STLA as talks continue to stall and are not close to meeting their demands. However, the UAW delayed any new shutdowns at Ford plants as talks continue to progress at a level they feel is very constructive to nearing a deal.
For the week shares were barely affected. Ford rallied 1.9%, closing up to $12.43. GM closed down only 13 cents on the week, while STLA gained two whole cents.
For the week shares were barely affected. Ford rallied 1.9%, closing up to $12.43. GM closed down only 13 cents on the week, while STLA gained two whole cents.
Earnings. Notable names representing some key sectors like Costco (COST) - Staples, Micron (MU) - Semiconductors, Nike (NKE) - Discretionary and Carnival Cruise Lines (CCL) - Travel & Leisure, report this week.
Stocks in Focus…
Costco (COST) shares have been trending just under their 52 week highs since July. The stock is up 23% YTD and hopes to add to those gains when they report earnings after the close on Tuesday.
The stock has rallied after five of its last eight reports and jumped 4.3% last quarter. The $570 level has acted as a strong resistance level on multiple occasions. Can a solid beat help them eclipse this mark?
It has been a challenging environment to break out to new highs. Over the last quarter several companies have beaten earnings, yet failed to rally. Coming into this report shares are facing key resistance just under $570. Its RSI is showing declining momentum as it made a lower high the last time COST shares rallied. We call this a negative divergence and a warning sign that the stock may not break out.
If it can, then watch for a run to all-time high at the $610 level. Any disappointment and a sell-off to the $530/$540 support could be the stock’s next resting spot.
Nike (NKE) shares have been struggling since its 2021 peak. It is 50% lower than that mark and off 22% year-to-date.
Shares have traded lower after four of its last five reports. The implied volatility on earnings day is +/- 5.6%. Any move lower and watch to see a possible re-test of its October 2022 lows of $81.19.
They report on Thursday after close and hope that this is the quarter to begin the climb back.
Economic Calendar
Tuesday - New Home Sales 8:30
Wednesday - Durable Goods 8:30
Thursday - Jobless Claims 8:30, GDP (revision) 8:30
Friday - PCE Index 8:30
THE WEEK THAT WAS
The markets anxiously awaited Fed Chairman Jerome Powell’s remarks following the FOMC decision to pause any new hike in interest rates after their meeting. The pause was expected. Sadly, what came as a surprise was the continued hawkish tone he took, as well as the “dot plot” that showed the consensus of the Fed was to keep rates higher for longer.
The confirmation of higher for longer and a swift rise in the two and 10-year yields caused the market to suffer its worst week since March and enough to keep investors on edge.
The Dot Plot. This represents where each Fed member projects the Fed funds target rate to be going forward. Last time the “dots” were revealed it showed that members felt the target rate would be 4.6% by next June. Now they believe that rate will be at 5.1%.
Essentially, no rate cuts for nine months! Based on that info alone, rates spiked and the market’s knee-jerk reaction was to sell-off.
IPO’hhs. This month saw the return of several high profile IPO’s. Two weeks ago retail investors poured into Arm Holdings (ARM). The stock priced above its range at $51 due to strong demand and interest. Shares opened to the public at $56.10 and then spiked over 35% from its initial pricing before giving back all of its gains.
Last week we got two more debuts in Instacart (CART) and Klaviyo (KVYO). Both stocks priced above their expected range at $30. Both experienced sizable pops at the open and then reversed course after the initial retail euphoria. CART gapped up 40% to $42, while KVYO jumped as much as 31% after its opening.
By the end of the week, all three of these IPO’s closed within a few ticks of their initial pricing. So what does this mean?
Quite simply, the retail appetite for new issues is there, but investors are more patient than they were in 2021 when things ran wild. The companies coming public have waited patiently for market conditions to improve as well as their own circumstances. Watch to see how these stocks act now that they are trading at their original pricing levels. Trading around these levels will be one part of what defines whether or not their debuts were successful. The real success test is how they trade over the long-term; that should be every company’s goal when going public.
Deals. Cisco (CSCO) announced it would be acquiring cybersecurity company Splunk (SPLK) for $28 billion. This was Cisco’s largest acquisition in its history as it continues to climb to its highest levels since its peak in 1999 (25-year monthly chart below).
That climb will be on pause for now as this deal is digested. Shares of CSCO closed lower by -4.4% last week, but are up 15.5% year-to-date.
Heat Map. This week’s map looks like a scene out of Game of Thrones. The market had its own red wedding as all 11 sectors fell. Some of the biggest losers were in the so-called “Magnificent 7”. Only Apple (AAPL) and Meta (META) managed to keep their losses to a minimum.
The small pockets of green you see were in Insurance stocks and Healthcare. They were the only bright spots in an otherwise dismal week.
STOCKS IN THE NEWS
FedEx (FDX) delivered earnings that beat analyst expectations and raised guidance for its first fiscal quarter. Shares jumped over 12% on the news but only managed to finish the week up 2.8%.
Apple’s iPhone 15 made its debut in stores on Friday to much fanfare. Lines were reported out the door at most Apple Stores including this one at the Oculus.
Despite all the fanfare, shares of the technology giant remained under pressure. The stock closed down -0.22 this week to close at $174.79. It has closed lower six of the last eight weeks and is now -12.2% below its recent and all-time high of $198.23 set back in July.
Alibaba (BABA) made news on two fronts. First, shares rallied 5% Friday on news that the Chinese government is considering easing rules that cap foreign investment in e-commerce platforms.
Secondly, the global online marketplace made bigger news as they announced their plan to file for a $1 billion-plus IPO for their logistics unit, Cainiao Network Technology. The plan is to list in Hong Kong as early as this week.
MARKET STATS
The historically worst seasonal stretch of the year lived up to its hype as the markets suffered their worst week since March. The Russell 2000 gave back almost all of its 2023 gains this month as it has now dropped -6.5%.
The Nasdaq 100 hasn't fared much better as it has given back -5.2% of its yearly gains just last week. The Dow fared the best, only losing -1.9%, thanks to some strength in its most highly weighted stock - United Healthcare (UNH).
SECTOR WATCH
Ouch! All eleven sectors finished the week lower by at least 1%. The worst of them was Consumer Discretionary (XLY) which lost -6.2% thanks to its two biggest components in Tesla (TSLA) and Amazon (AMZN) falling -10.8% and -8%, respectively.
The stocks that led, or in this case went down the least, were defensive in nature in Healthcare (XLV), Utilities (XLU) and Staples (XLP). I discussed the rotation into Staples last week with CNBC’s Frank Holland on Worldwide Exchange.
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