For the week ending August 1, 2014, one CI Market Dashboard indicator was bullish, four were bearish and four were neutral. There were no signal changes this week, but there one was new confirming bearish signal.
Robust economic news this week fueled fears that the Fed may raise short-term interest rates sooner, rather than later. After shrinking in the first quarter, the U.S. economy recovered strongly in the second quarter, with real gross domestic product (GDP) growing 4.0%, according to the Commerce Department. This surpassed economists’ forecasts and made up for the first-quarter decline, which was upwardly revised to -2.1% from -2.9%.
In a statement after the July 29—30 meeting of the Federal Open Market Committee (FOMC), the Fed cited the growing economy as a reason for it further reducing its stimulative bond purchases, down to $25 billion a month from $35 billion. The Fed’s statement also had a change in its assessment of inflation, stating that inflation appears to be accelerating from a low rate. Raising interest rates is another tool the Fed uses to stave off inflation. Trying to allay investor fears, however, the Fed said it would likely wait “a considerable time” after the end of its bond-purchase program before raising rates as it analyzes the labor market, inflation and other economic developments. It had previously said that it would end the asset purchase program in October, if the economy was progressing as expected.
By the end of this week, weary investors were looking for any sort of a silver lining. They may have found it in the lackluster labor figures, which had some hoping that it would prompt the Fed to maintain the historically low interest rates longer than expected.
Overseas, the showdown between Russia and the West intensified this week, with the European Union (EU) instituting even stiffer military and financial sanctions against the government of Vladimir Putin for its support of separatists in Ukraine. Calls for more drastic measures intensified after Ukrainian authorities confirmed that shrapnel from a missile—possibly fired by the aforementioned separatists—destroyed Malaysian Airlines Flight 17.
The new EU sanctions target Russia’s oil industry, defense, dual-use goods and sensitive technologies, in what is shaping up to be the biggest confrontation between Moscow and the West since the days of the Cold War. The sanctions will limit Russia’s access to EU capital markets, impose an embargo on arms trades, establish an export ban on dual-use goods for military purposes and limit Russia’s access to sensitive technologies, specifically those related to the oil sector. The EU sanctions will initially last one year, but diplomats say they will be reviewed after three months.
European sanctions carry with them considerable risk, as Russia is a major trading partner. There are concerns among individual EU countries that the sanctions could harm local economies and derail the EU’s own fragile economic recovery.
The U.S. followed suit, imposing its own set of sanctions targeting Russia’s energy, arms and banking industries. The new U.S. measures target three state-controlled banks and Russian shipping firms. President Obama said the U.S. would continue to engage Mr. Putin on a diplomatic solution to the crisis, while insisting that Moscow’s standoff with the West does not mark the beginning of a new Cold War. “It does not have to be this way. This is a choice that Russia, and President Putin in particular, has made,” Mr. Obama said. “It’s not a new Cold War,” he added. “What it is is a very specific issue related to Russia’s unwillingness to recognize that Ukraine can chart its own path.”
In addition, the ongoing hostilities between Hamas and Israeli Defense Forces continued to escalate. A shell hit a United Nations school in the Gaza strip, killing 20 people who had sought shelter there. UN officials stated that Israeli forces fired the shell. After three weeks of fighting, over 1,200 Palestinians have been killed along with nearly 60 Israelis. As UN and U.S. diplomats continue to try to forge a lasting ceasefire, Israeli Prime Minister Benjamin Netanyahu told his country to brace for an extended campaign.
Sovereign debt worried also weighed on the market this week, as Argentina slid into default on its international debt for the second time in 13 years. After negotiations between government negotiators and “vulture” funds holding bonds failed to break an impasse, bond rater Standard & Poor’s declared the country to be in “selective default.” President Cristina Fernandez’ cabinet chief, Jorge Capitanich, blamed the United States and said his country may resort to the International Court of Justice at The Hague or the United Nations. “This is the fault of the United States for not acting properly,” Capitanich said. “This is a shame.” The Fernandez government had warned that a default was unavoidable after the U.S. Supreme Court in June upheld a lower court ruling that Argentina owed full payment to holdout bondholders who refused to accept discounts in earlier restructurings of debt after a 2001 default. A group of Argentine bankers tried without success to negotiate directly with the bondholders, who are led by New York-based Elliott Management. Those talks are continuing, with assists from “international mediators,” according to Argentine news reports.
Looking at the U.S. equity markets, the Dow Jones industrial average (DJIA) dropped 2.8% this week—its biggest weekly loss since January—to close at 16,493.37. Thursday’s 317-point drop blew past the 50-day moving average, which undoubtedly accelerated the downward momentum via program trading. The 16,400 level is key support, as it initially served as resistance in March and April and then became support in April and May. For July, the DJIA lost 1.6%.
The S&P 500 Index (SPX) surrendered 2.7% this week to close at 1,925.15. It, too, violated its 50-day moving average on Thursday, with the 1,925 level as the next intermediate support level. If this does not hold, do not look for support until the 1,875 level. All nine S&P Select Sector SPDR ETFs posted a loss for the week. After being the biggest winner last week, the energy sector turned in the worst weekly performance, dropping 4.0%. The health care sector was this week’s “winner,” posting a 1.41% loss. For the month, the large-cap index lost 1.5%.
The broad market Wilshire 5000 (W5000) index lost 2.7% this week and broke through its 50-day moving average. The 20,250 level is the next intermediate support level, followed by round-number support around 20,000. For the month, the Wilshire shed 2.2%.
Lastly, the Nasdaq Composite (COMP) lost 2.2% for the week to close at 4,369.77. It, too, broke 50-day support, but only slightly. The 50-day moving average stands at 4,363.68 while the 4,350 level is the next line of support. For the month, the tech index lost 0.9%.
Looking at small-cap stocks, the downward slide continued this week as the Russell 2000 lost 2.6% to close at 1,114.86. Most disconcerting is that the index broke below its 200-day moving average on Thursday. The next intermediate support level is around 1,095.
As earnings season draws to a close, a few more big-name tech firms reported their quarterly results this week:
- Twitter (TWTR): $0.02 per share reported versus the consensus estimate of $(0.012) (+266.7% surprise)
- Yelp (YELP): $0.04 per share reported versus the consensus estimate of $(0.033) (+221.2% surprise)
- Expedia (EXPE): $1.03 per share reported versus the consensus estimate of $0.761 (+35.3% surprise)
- GoPro (GPRO): $0.08 per share reported versus the consensus estimate of $0.06 (+33.3% surprise)
- LinkedIn (LNKD): $0.51 per share reported versus the consensus estimate of $0.389 (+31.1% surprise)
Looking back on some of this week’s key economic data and news:
- Pending home sales fell unexpectedly in June after three straight months of growth. The National Association of Realtors’ (NAR) index slipped 1.1% from May and is down 7.3% year-over-year. The group cited flat wages, stricter credit requirements and regional supply shortages as reasons for the decline.
- The U.S. economy rebounded sharply in the second quarter, with gross domestic product (GDP) expanding at a 4.0% annual rate, the Commerce Department reported. This surpassed economists’ forecasts of 3.0% growth for the quarter. In addition, first quarter growth was revised to a 2.1% decline versus the previously reported 2.9% contraction. However, the 1.8% growth for the first half of the year is still well below the economy’s estimated 2% to 2.5% potential.
- In light of the strong second-quarter GDP growth, the Fed announced it was cutting its monthly bond-buying stimulus by an additional $10 billion to $25 billion. It did suggest, however, that it would be a “considerable time” before it would start hiking up interest rates.
- Automatic Data Processing (ADP) reported that employers added 218,000 private-sector jobs in July, down from a 281,000 increase in June. This marks the fourth consecutive month of job growth above 200,000. However, economists were expecting a 235,000 increase in July.
- The Bureau of Labor Statistics reported that the employment cost index rose 0.7% in the second quarter, the fastest growth since 2008. Wages and salaries increase 0.6%–the most in nearly six years—while benefit costs increased 1% (the most in three years). This added to speculation that the Fed may be forced to raise short-term interest rates sooner rather than later to fight inflation.
- Initial claims for state unemployment benefits increased 23,000 to a seasonally adjusted 302,000 for the week ended July 26, the Labor Department reported. This was higher than economists’ forecasts. The four-week average of claims fell 3,500 to 297,250, the lowest level since April 2006. The prior week’s claims were downwardly revised by 5,000 to the lowest level since May 2000.
- The Labor Department reported that non-farm payrolls grew by 209,000 in June, below expectations of a 233,000 increase. This was down from an upwardly revised 298,000 increase in June. Furthermore, the unemployment rate increased to 6.2% after economists had forecast a decline to 6.0%. Underemployment—those working part-time for economic reasons—rose to 12.2%.
- The Institute for Supply Management (ISM) reported its index of national factory activity rose to 57.1 in July from 55.3 in June. This is the highest level since April 2011. The reading also topped expectations of 56. Readings above 50 indicate expansion in the manufacturing sector. The employment component surged to 58.2 in July from 52.8 in June, reaching its highest level since June 2011.
- The final University of Michigan/Thomson Reuters consumer sentiment index was 81.8 in July, down from 82 in June but higher than the preliminary July reading of 81.3. Economists had expected an 81.9 reading.
- The Commerce Department reported that U.S. construction spending fell 1.8% in June. Outlays are still up 5.5% from the same time last year, however. Economists had expected a 0.3% increase. Spending in May was revised upward to show a 0.8% gain instead of 0.1%.
- The Commerce Department also reported that consumer spending rose 0.4% in June, the biggest increase in three months. This matched economists’ forecasts.
In terms of the CI Market Dashboard, the iShares Dow Jones U.S. Index Fund (IYY) fell 2.6% this week to close at $97.17. The drop took out intermediate support at $99 and $98 and narrowed the gap with the 100-day moving average to 0.85% from 3.72% a week ago. Both the $97 level and the 100-day moving average now stand as near-term support levels.
To see what happened with the individual Dashboard indicators this week, visit the CI Market Dashboard site.