The S&P 500 has re-traced back to a critical line in the sand that will determine if stocks fall and re-test prior lows or begin a new uptrend. The evidence up until Friday was that an impulsive move from the 10/29 low had enough legs into and after the election to make a run at new highs. However, Friday’s weak price action warns that we may have run out of gas and that the odds are rising that a re-test the 10/29 low is on tap. Take a look at the chart below of the S&P 500 ETF (SPY):
The other major indices all have the same type of technical set-up so the stock market has all of its eggs in one basket. The bounce is over and now we have the aftermath of the elections and a Fed that will likely raise interest rates one more time before 2018 is over. Earnings season was largely a good one but there were several companies that guided for lower revenues so that implies a tougher growth environment in the coming months.
All the news is out at this point so the technicals will dominate the analysis in the coming sessions.
Chart of the Week!
Economic & Central Banking Snippets
- Housing supply has moved up to 7 months which is the highest since 2011 and consistent with growth slowing. However, the real estate market may need time to adjust to higher interest rates so this may be short-lived but it is definitely worth watching in the coming months.
- Italy’s economy came to a standstill in Q3 amid political tumult and volatility in the country’s financial markets. This period was marked by waves of volatility for Italian sovereign debt, as investors paid close attention to the coalition government’s plans, following elections in March. The situation remains fraught with Italy engaged in a stand-off with Brussels over its proposed budget that broke the bloc’s fiscal rules.
- Japanese industrial production fell 1.1% in September, compared to the previous month, according to the Ministry of Economy, Trade and Industry. Falls for transport equipment and general purpose, production and business oriented machinery contributed to the decrease, alongside iron and steel. (FT)
- South Korean industrial production fell 2.5% month-on-month in September, a steeper drop than the 1.5% decline forecast by economists in a Reuters poll. (FT)
- US wage growth jumped in October to its highest rate in almost a decade, while the pace of hiring rebounded, according to data released on Friday. Non-farm payrolls rose by 250,000 in October, eclipsing economists’ estimates for 190,000, according to a survey by Reuters. Average hourly earnings rose 3.1% year-on-year — the highest level since April 2009. October payrolls grew by 250k, 50k more than expected and there were no net revisions over the two prior months. The household survey reported a big number with a 600k increase in new jobs but because the labor force grew by a whopping 711k, the unemployment rate held at 3.7% while the U6 fell one tenth to 7.4%.
Macro Snippets
- General Electric has cut its dividend for the second time in less than 12 months, as it reported earnings below analysts’ expectations and announced a radical restructuring of its troubled power equipment division. The earnings are the first to be reported under Larry Culp, the company’s new chief executive, who was appointed suddenly last month after the departure of John Flannery. (FT)
- The $1.3 trillion market for risky high yield loans has regulators worried. Activity in the U.S. market has boomed and U.S. officials are leading the warning calls. Standards in the leveraged loan market have been slipping as more aggressive private-equity deals have pushed debt multiples higher and eviscerated the traditional protections, known as covenants, that allow lenders to intervene if borrowers start to struggle. Globally, corporate leveraged loans are larger than U.S. subprime mortgages in 2006 and growing as quickly. Banks tend to sell these loans to mutual funds and collateralized loan obligations. (WSJ)
- Coca-Cola branded energy drinks may soon hit store shelves as the beverage giant returns to a growing category that would put it in competition with partner Monster Beverage. However, the products won’t be released until at least April as Coca-Cola works through an arbitration on whether the drinks – made with caffeine from natural sources and guarana extract – are in violation of a prior agreement between the two industry players. (Seeking Alpha)
That is all for now until next week’s Market Update. If someone forwarded you a copy of this report, you can sign-up directly at www.kiscocap.com.
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Paul J. McCarthy, III
President – Kisco Capital
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