The major story of the past week has surrounded the highly unsettled emerging markets amid a steep decline in currency valuations in developing nations that spilled over into more developed nations like Canada, Mexico and South Korea. Geopolitical turmoil in Syria, Turkey, Ukraine, Egypt and Iraq further rattled global markets taking the major averages lower for five straight sessions and putting a damper earnings season that has so far been pretty decent.
As far as the January effect is concerned, it will have to wait until February to make any kind of a significant difference in the current cautious sentiment. The long awaited earnings from Apple (AAPL) were a big disappointment and the stock was punished for it, down more than 8%.
This comes on the back of disappointing Q4 results by IBM (IBM) and Intel (INTC) that shows just how legacy tech companies are struggling to transition their business models to align themselves with new technologies.
The two-day FOMC meeting will culminate with a policy statement today at 2 p.m. EST. Market observers are forecasting the Fed will hold Fed Funds at 0.25% while announcing a further tapering of QE by $10 billion taking the monthly bond buying program down to $65 billion per month.
The idea of the Fed cutting back on the amount of liquidity it’s injecting into the financial system is being construed as a negative for emerging markets that saw heavy capital flows as a byproduct of QE as investors pursued higher rates of return than the incredibly low yields offered in the United States.
What is clear is that the threat of contagion among emerging market financial systems needs to run its course with reassurances from central banks before the leading stock markets around the world can be reinvigorated. It would also help to see China’s government address the manufacturing shortfall that triggered the selloff. Some stimulus injection would do much to assuage investor concerns of a further contraction of the monthly PMI.
Until then, it’s pretty much up to the earnings calendar to keep the Dow, S&P and Nasdaq intact at current levels, which will eventually bring buyers back en mass as these events pass, and in my view they will.
The S&P 500 broke its 50-day moving average at 1,812 and currently trades at 1,786. It’s trying to circle the wagons around the healthcare, energy and financial sectors. Once certain technical support levels are violated, the machines take over and program trading will trigger broader selling of shares. This is true on the way up as well, but unfortunately stocks fall faster than they climb and all of December’s gains have been eliminated in the span of five days. It’s just how human emotion operates; fear is greater than greed.
Market technicians are looking at 1,765 to be the next psychological support level for the S&P where floor traders claim bargain hunters will emerge. Trying to game the Fed’s decision tomorrow is what is driving today’s tape. The unsettled foreign markets, weaker than expected housing and durable orders data this week have some speculating the Fed may wait on further tapering, but by every indication voiced by Fed officials leading up this week’s meeting, they are going to taper.
Because busted stocks like Apple and IBM are such heavily weighted components to the Nasdaq and Dow, it will take the efforts of several other big cap names to carry the bull’s torch to restore upside momentum. Other Dow stocks that have reported Q4 numbers that failed to impress include DuPont (DD), Johnson & Johnson (JNJ), United Technologies (UTX), Intel (INTC) and UnitedHealth Group (UNH).
Those stocks that will be charged with taking the lead that have reported include American Express (AXP), Wells Fargo (WFC), Pfizer (PFE), Microsoft (MSFT) and Caterpillar (CAT), which are all getting good institutional sponsorship.
As other Wall Street darlings like Google (GOOG) and Gilead Sciences (GILD) that better represent big-cap, high-growth-revenue stories, I think the market will find its footing and get back in gear.
That process will likely begin sometime next week