Dow Jones Industrial Average
Standard & Poor’s 500
Nasdaq Composite
Week 03 Recap
On Monday, bond and equity markets were closed for Martin Luther King Jr. Day.
Tuesday saw the major averages begin the abbreviated week on a mixed note as the Nasdaq added 0.7% while the Dow Jones Industrial Average shed 0.3%. For its part, the S&P 500 rose 0.3% as eight of ten sectors finished in the green. Stocks began the day with solid gains but the early strength faded quickly when the S&P 500 was unable to extend above the 1850 level during the opening minutes. That rejection emboldened sellers, who promptly drove the indices to their lows. Adding insult to injury was the fact that mostly better-than-expected earnings reported ahead of the opening bell failed to entice buyers.
The market endured an uninspiring Wednesday session, which unfolded in similar fashion to Tuesday’s affair. Once again, the major averages ended mixed with the Dow Jones Industrial Average (-0.3%) coming out on the losing end while the Nasdaq (+0.4%) and S&P 500 (+0.1%) eked out modest gains. The price-weighted Dow spent the entire session in the red as 19 of its 30 components registered losses. Most notably, the second-largest index member, IBM (IBM 179.64, -3.09), plunged 3.3% after beating its Capital IQ earnings estimate by 13 cents on below-consensus revenue. Despite the bottom-line beat, the report was scrutinized due to the company accounting for a lower tax rate than in previous quarters.
On Thursday, the S&P 500 snapped its modest two-day win streak with its second-largest decline of the month. The index lost 0.9% as nine of ten sectors registered losses. Although stocks sold off throughout the day, the weakness actually started during the overnight futures session when three China-related developments began fueling the risk-off sentiment:
- The HSBC flash PMI reading for January was below expectations at 49.6. The sub-50 reading is indicative of manufacturing activity contracting; and the January reading marked a six-month low for the series.
- A Financial Times report indicated Chinese authorities are working to prevent a default of a $500 million high-yield investment trust, failure of which could trigger an unnerving fallout in China’s shadow banking system.
- An SEC administrative law judge issued a ruling that censures the accounting arms of the “Big Four” in China for six months due to their unwillingness to turn over requested documents involving US-listed Chinese companies under investigation for accounting fraud.
The three developments did enough damage to sentiment that a slate of mostly better-than-expected earnings could not halt the day-long slide. The discretionary sector (-0.7%) finished just ahead of the broader market after last year’s top S&P 500 component, Netflix (NFLX 386.08, -2.64), surged 16.5% in reaction to its bottom-line beat and above-consensus guidance.
On Friday, equities endured a rough end to the abbreviated week with the S&P 500 seeing its largest weekly loss since June 2012. The benchmark index fell 2.1%, extending its January decline to 3.1%. The market spent the entire session in a steady slide amid continued concerns regarding China. Furthermore, participants kept a close eye on the foreign exchange market where emerging market currencies weakened while the Japanese yen saw its second consecutive day of gains. Dollar/yen fell below the 102.50 level after trading near 104.50 on Wednesday. The yen strength came about after Bank of Japan officials said the Japanese economy remains on track and there is no need for additional easing at this time. In turn, this posed a headwind to yen-based carry trades, which played a significant part in last year’s market rally.
Summary
Heading into Week 2 of 2014, this selling might continue. On average, week 2 for the past 5 years has churned out around a loss of 0.5%. I am not betting against this historical statistics for this week.
Direction for Week 2 – DOWN
Week 2 was definitely down with a the bulls and bears almost equally matched. But I would reckon that the bulls are slightly stronger to have closed the week 2 session. In week 3, as predicted, market let down with bearishness that is not seen for almost the whole of 2013. The major averages lost between 1.65% and 3.52% for the week, easily the most bearish week of 2014 thus far. I said “as predicted” because week 3 of any year tends to be bearish in nature.
VIX
For the 5 days trailing period, DJIA lagged the whole market with a loss of 3.52% while Nasdaq Composite lost the least with a loss of 1.65%. Year-To-Date, 2014 has been in bearish territory. This is not seen especially after a solid bullish year in 2013.
The laggards in this bearish week are Materials, Industrials and Financials; losing 4.49%, 3.88% and 3.74% respectively. On the other hand, sectors that lost the least are Utilities, Consumer Staples and Energy; losing 0.21%, 1.4% and 1.95% respectively.
The sector performance is definitely in line with the market performance with the cyclical sectors lagging the market and the counter-cyclical counters “leading” the market. Materials were the worst hit with a near 4.5% loss for the week.
On a side note, volumes on Friday’s sell down was also higher than average, standing at 900m comparing to the 1 month’s average of 660m.
Technical Updates
Resisted at the high of 16600 made 3 weeks ago, DJIA has been in consolidating phase for the past 3 weeks and the breakdown came on Thursday and Friday. For the week, I am not expecting a selldown that is as strong as what we just seen, but certainly I am not expecting a bullish triumph for the week. Heading forward, 15700 to 15800 levels will be a likely support zone. Moreover, the 100 SMA will also likely to act as dynamic support for DJIA. I am also looking at the 50 SMA and 20 SMA as possible resistances moving ahead this week.
Similarly, a double top is forming on the SPX with the index resisted twice around the 1850 levels. Also similar to the DJIA, SPX was in range bounded action for the past 2 weeks, till the breakdown came on Friday. the 20 SMA and 50 SMA didnt act as support at all. Moving forward, 1760 and 1770 levels will be acting as a support zone while 1810 will act as a resistance zone.
NASDAQ Composite, after closing 2013 as the best performing benchmark, was also behaving in the consolidated phase for the past 3 weeks. It was range bounded between 4100 and 4250 levels. Unlike DJIA and SPX, COMP broke down the 20 SMA and is looking to head down wards to test the 50 SMA which is around the 4100 levels. It’s likely that COMP will get resisted at 4200 moving forward, and will be more likely to head towards the 4050 level.
Bond Market
The Week in Review
- Treasuries saw solid gains this week with maturities finishing at their best levels of 2014.
- The week got off to a quiet start, but Thursday’s disappointing Chinese HSBC Flash Manufacturing PMI and concerns over the health of the Chinese shadow banking system sparked a strong bid over the latter part of the week.
- Data was light, and slightly disappointing, with existing home sales (4.87M actual v. 4.90M expected) and leading indicators (0.1% actual v. 0.2% expected) both falling short of estimates.
- Buying was paced by the long end with the 30y tumbling -11bps over the course of the week. The 30y ended Friday’s session @ 3.651%, more than 30 bps off its late-2013 high, posting its lowest close since Halloween.
- The 10y shed -8bps on the week, ending @ 2.735%. Participants will be watching the 2.700%/2.750% area over the coming days as support at the level is all that stands in the way of a test of the 200 dma (2.526%).
- The 5y lagged during the first half of the week as sellers concentrated their efforts on maturities in the belly of the curve, but a steady bid on Thursday and Friday caused it to finish in-line relative to its peers. The yield slipped -6bps to settle @ 1.564%, and finished Friday’s session with its lowest close since December 18, the day the Fed announced its taper.
- A volatile week up front ended with the 2y -2bps @ 0.356%. Early action saw the yield climb above the 0.410% level, but the safety bid won out in the end. Many traders continue to monitor the front of the curve for any signs of skittishness ahead of the February 7 debt ceiling deadline.
- This week’s buying flattened the yield curve as the 2-10-yr spread tightened to 238bps.
Macroeconomic Data (Week 4)
Summary
Cyclically, Week 3 is bearish. And Week 4, is likely to follow suit but to a lesser extent. I am expecting largely sideways movement for this week with a slightly bearish tone. However I would also pay attention to Wednesday where the FOMC statement is released. Given the sentiment-driven market, what the Fed says will have a strong bearing on the performance.
Direction for Week 4 – DOWN
