Stocks finished mostly lower Monday, pausing for breath after Friday’s rip-roaring run to new record highs. The Dow Jones Industrial Average lost 0.2%, the S&P 500 Index lost a fraction, and the Nasdaq Composite gained 0.2%.
Click to Enlarge Crude oil was hammered again, losing $2.25 a barrel to drop to $78.29 at last check — settling below $80 for the first time since June 2012. This was driven partially by the ongoing strength of the U.S. dollar, which also weighed against precious metals.
Gold mining stocks got a lift from earnings news, however, with the Market Vectors Junior Gold Miners (GDXJ) adding 5.9%.
Sentiment was weighed down by some disappointing manufacturing activity data out of China and Europe overnight, reinforcing the idea that the non-U.S. global economy is in a bit of a rut. Measures of U.S. factory activity, however, surprised to the upside with the ISM Manufacturing Index climbing to match the result from August — tying for the best result since early 2011. New orders, the most important sub-index in the report, increased to a white-hot 65.8, suggesting that demand is building within the supply chain.
Click to Enlarge Translation: Factories should remain busy in the months to come.
All eyes now turn to the upcoming midterm elections Tuesday night. The growing consensus is that the GOP will retake the Senate, with the Washington Post putting the odds at 96%, CNN at 95%, and the New York Times at 70%.
The question now seems to be how large the Republican majority will be and how Wall Street will interpret the outcome.
It could be spun as a negative if it ushers in return of the contentious fiscal fights seen after the GOP takeover of the House in 2010. These fights resulted in market turbulence in 2011 as America’ lost its AAA credit rating, in 2012 on fears over the fiscal cliff, and in 2013 on concerns over the government shutdown and debt ceiling. These fights were political liabilities for Republicans, so they might not be interested in repeating them.
It also could be spun as a positive on chatter that the GOP will push ahead on market-friendly initiatives like reforming the tax code, especially corporate taxes. There has been a lot of interest in areas like tax inversion deals and the offshore cash savings. Some progress here could result in the renationalization of foreign assets to be used for things like capital expenditures and stock buybacks.
Technically, the market is a bit extended on a short-term basis, but this being offset by chatter that we’re entering the best period of seasonal strength on the calendar. Historically, between November and January, the S&P 500 has gained 3.4% on average vs. a gain of 1.9% for three-month periods in general.
For now, I continue to recommend investors cautiously focus on areas of strength that are breaking to the upside such as social media and biotech/pharma.
Click to Enlarge Examples include the Global X Social Media (SOCL), which gained 2.7% today and is up 3.8% for Edge subscribers as it jumps its 200-day moving average, as well as Catalyst Pharmaceuticals (CPRX), which is up more than 13% for subscribers since Oct. 23.
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