Although the Dow industrials and the S&P 500 fell for the fourth straight day, the Nasdaq had a plus-day. Weakness was attributed to upbeat economic reports, and thus worries that the Federal Reserve will begin to taper its bond purchases in December, even before the new Fed chairwoman takes the reins.
So far this week, the S&P 500 is down 0.7%. But the index has gained 26% year to date, and so investors are fearful of taking new positions following one of the best years in recent memory. However, at one point Wednesday, the Dow industrials were off 123 points and reversed to regain almost 100 points before the close.
New home sales in October jumped to an annual rate of 444,000, well above expectations of 426,000. And ADP reported that 215,000 private-sector jobs were added last month versus expectations of 178,000. The increase peaked interest in the U.S. government’s employment report due on Friday. The Fed has said repeatedly that jobs would be an important factor in its decision to taper the current bond-buying program.
At Wednesday’s close, the Dow Jones Industrial Average was off 25 points to 15,890, the S&P 500 fell 2 points to 1,793, and the Nasdaq rose 1 point to 4,038. The NYSE traded total volume of 3.6 billion shares, and the Nasdaq traded 1.9 billion. Decliners outpaced advancers by 1.6-to-1 on the Big Board and by 1.4-to-1 on the Nasdaq.
Even though the Dow industrials had an impressive late-day rally from their lows, the chart action for this week has been less than comforting. The 20-day moving average gave way Wednesday, and MACD flashed a sell signal on Monday. The next support is at the breakout line at 15,823, and then at the 50-day moving average at 15,557.
The mid-cap and small-cap stocks have been acting better than the major indices since early this year. And even this week, when we expected strength in the blue chips, the lower-quality issues have been pulling in buyers.
On Wednesday, the Nasdaq reversed from its low, which was close to the support line at 4,005, and closed on an uptick. Its MACD indicator, though not strong, has yet to issue a sell signal.
Conclusion: December has historically (in the past 100 years) been strong about 75% of the time, appreciating an average of about 1.6%, according to point-and-figure chartists Dorsey Wright & Associates. And so the chances are strong that any early weakness in the month will be followed by the traditional Santa Claus rally.
While everyone waits for the Fed to consider Friday’s jobs numbers, we should consider other economic factors that the governors have established that will help them decide on a course of action:
— New home sales did jump in both October and November, but existing home sales have been stubbornly weak, falling 3.2% in October;
— Durable goods orders fell 2% in October, and the Fed’s Philly region saw its manufacturing index plunge in October;
— Retail sales for the pre-holiday period have not reached expectations;
— And inflation — a key determinate of policy — is running at just 1% annually.
My guess is that the Fed will do nothing, recent selling will abate this week, and the market will turn flat until mid-December, when buyers will enter for a year-end rally.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.