For the week ending August 15, 2014, three CI Market Dashboard indicators were bullish, two were bearish and four were neutral. There were two new bullish signals this week as two previously-bearish signals went positive.
For much of this week, eroding tensions in the Middle East and in the Ukraine soothed the nerves of jittery traders and investors, even as economic data coming out of Europe cast doubt on the euro zone’s recovery. On the home front, however, data this week, while not terrible, was weak enough to raise hopes that the Fed would push back raising short-term interest rates. However, the relative calm on the Russia-Ukraine border was shattered on Friday when Ukrainian artillery destroyed an armored column that had entered the country from Russia, sparking a late-week sell-off.
The momentum from last Friday’s market rebound carried into Monday, as Egypt brokered another 72-hour ceasefire in Gaza between Israeli Defense Forces and Hamas. Tensions also seemed to be easing along the Russia-Ukraine border following the conclusion of Russian military exercises last week. However, NATO reported there was no sign Russian had withdrawn the troops it had amassed along the border with Ukraine. Furthermore, skeptics questioned the motives behind the “aid convoy” that Russian President Vladimir announced he was sending to eastern Ukraine. European Commission President Jose Manual Barroso, in a phone conversation with Putin “warned against any unilateral military actions in Ukraine, under any pretext, including humanitarian.” The recovery of the euro zone was also called into question, after indicators pointed to likely weak economic growth in Germany—Europe’s main growth driver of late—over the coming months. In conjunction with that announcement, forecasts from Moody’s Investors Service showed only marginal growth for the world’s 20 largest economies for 2014.
On Tuesday, more data added a fresh douse of cold water to Germany’s near-term economic prospects, and that of entire euro zone, as the country’s business sentiment index had its biggest monthly decline since June 2012. Domestically, job openings rose to a 13-year peak, but the number of those quitting their jobs also hit a six-year high.
Wednesday, buyers came off the sidelines, pushing the broader market indexes convincingly higher. Disappointing retail sales figures actually helped move things along, as traders and investors see any “bad” news as reasons for the Fed to delay interest rate increases.
Clouds seemingly continued to lift in the Middle East and Eastern Europe on Thursday, which allowed U.S. markets to continue Wednesday’s upward momentum. In a statement regarding the situation in eastern Ukraine, President Vladimir Putin said Russia “will do everything in our power so that this conflict is ended as soon as possible.” In Gaza, Israeli Defense Forces and Hamas agreed to extend their ceasefire while continuing indirect talks mediated by Egypt. These developments helped traders overlook disappointing growth numbers from several EU member countries, including France and Germany, as well as hawkish statements from St. Louis Fed President James Bullard, who would like to see an interest rate increase by March 2015.
Thursday’s announcement that Iraq’s Prime Minister Nouri al-Maliki was stepping down further buoyed market sentiment at Friday’s open. After eight years of tumultuous rule, the move hopes to unify the country’s government against Islamic State militants. The move comes after intense pressure from the Obama White House, Shiite members of Maliki’s own party, and Shiite religious figures and Iran. This marks a surprising reversal, after Maliki had assured his supporters a day earlier that he would not step down until Iraq’s high court and ruled on the naming of another to the premiership.
However, the market dropped within the first hour of trading on Friday following news Ukrainian troops had attacked an apparent Russian armored column that had crossed the Ukraine border, reviving geopolitical worries. The episode took place near where Russian trucks, supposedly loaded with relief supplies destined for eastern Ukraine, had stopped for the night. Anders Fogh Rasmussen, secretary-general of the North Atlantic Treaty Organization (NATO), described the movement overnight as a Russian “incursion” and a “clear demonstration” that Moscow is supplying rebel groups in eastern Ukraine.
Looking at the U.S. equity markets, the Dow Jones industrial average (DJIA) added 0.7% this week to close at 16,662.91. The blue chip index regained the 16,600 level, which would be the first line of support to the downside. Looking upward, round-number resistance at 16,800 is possible.
The S&P 500 Index (SPX) rose 1.2% for the week to close at 1,955.06, falling short of its 50-day moving average of 1,957.06. The 1,960 level, in recent months, offered support, so it may present an intermediate resistance level. Meanwhile, 1,950 would be the first point of intermediate support. All nine S&P Select Sector SPDR ETFs were up this week, with health care posting a strong 3.48% gain, followed by industrials, which rose 3.03%. The energy sector lagged with only a 0.68% increase for the week. The technology sector was near the back of the pack as it posted a 2.26% gain this week.
The broad market Wilshire 5000 (W5000) rose 1.3% this week to close at 20,704.88. We expect the 20,750 level to offer some resistance, while the 20,500 level looks to be the first intermediate support level.
The Nasdaq Composite (COMP) jumped 2.2% this week and closed at 4,464.93. The move put the tech index back above its 50-day moving average and near levels not seen since late 2000. The 4,475 level presented insurmountable resistance in early and late July, so expect this to offer at least some resistance once again. To the downside, the 4,350 level appears to be an intermediate support level.
Small-cap stocks, as measured by the Russell 2000, gained 0.9% this week as the index closed at 1,141.65. The index filled in a downward price gap from late July, but it appears to be butting against another gap around the 1,155 level from mid-July. Intermediate support is around the 1,130 level.
Tech Sector Earnings & News
Earnings reports continue to in from key tech firms:
- Applied Materials (AMAT); $0.28 per share reported versus $0.27 consensus estimate (+3.7% surprise)
- Autodesk, Inc. (ADSK); $0.35 per share reported versus $0.285 consensus estimate (+22.8% surprise)
- Cisco Systems (CSCO), $0.55 per share reported versus $0.53 consensus estimate (+3.8% surprise)
- Cree (CREE); $0.42 per share reported versus $0.409 consensus estimate (+2.7% surprise)
- JDS Uniphase (JDSU); $0.14 per share reported versus $0.131 consensus estimate (+6.9% surprise)
- King Digital Entertainment (KING), $0.59 per share reported versus $0.59 consensus estimate (no surprise)
- NetApp Inc. (NTAP); $0.60 per share reported versus $0.567 consensus estimate (+5.8% surprise)
- Priceline (PCLN), $12.51 per share reported versus $12.024 consensus estimate (+4.0% surprise)
Also, a report from ratings agency Fitch warned that Apple’s (AAPL) and Samsung’s market share is set to decline as cost-conscious emerging markets become increasingly important. According to the report, a combination of rising competition from low-cost local manufacturers in emerging markets, and saturation in developed markets, will hurt the two smartphone makers. Apple is widely expected to release the new iPhone 6 in September, while Samsung is expanding into the smartwatch arena, but Fitch does not believe this will be enough to stem the tide.
Looking back on some of this week’s key economic data and news:
- The Fed’s No. 2 official, Vice Chair Stanley Fischer, said that global growth had been “disappointing” and warned of fundamental headwinds that might temper future gains. He noted that although the weak recovery might simply be fallout from the financial crisis and the recession, “it is also possible that the underperformance reflects a more structural, longer-term shift in the global economy.” Mr. Fischer also conceded that economists and policy makers had been repeatedly disappointed as the expected level of growth failed to materialize. Fischer also warned of three pronounced headwinds that have held back growth in the United States: a still anemic housing market, cuts in federal government spending and weaker global growth that reduced demand for American exports.
- Indicators tracked by the Organization for Economic Cooperation and Development indicate that Germany’s economic growth is likely to remain weak in over the coming months, clouding the outlook for the broader euro zone’s recovery. The runs counter to recent German government projections for improvement following contraction in the second quarter. In addition, the body’s gauge of future economic activity suggests growth in most developed economies will remain around current rates, with large developing economies making a smaller contribution to global economic growth than in the years after the 2008 financial crisis. Based on its analysis, global growth appears unlikely to pick up significantly this year.
- Forecasts published by Moody’s Investors Service said it expects that economic output from the Group of 20 largest economies—that account for 90% of global activity—will grow by 2.8% this year, a slight pickup from the 2.7% rate of growth recorded in 2013. Moody’s expects growth will accelerate to 3.2% in 2015.
- The German ZEW Economic Sentiment Index declined by nearly 18 points to hit a low of 8.6 for the month. This is the largest decline since June 2012, raising more questions about the stamina of Europe’s largest economy.
- U.S. jobs openings rose to a 13-year high of 4.7 million in June, according to the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS). New hirings reached 4.8 million in June, while 2.53 million people quit their jobs, a six-year high.
- U.S. retail sales were virtually unchanged from June to July, indicating a loss of momentum in the U.S. economy at the start of the third quarter. The Commerce Department also reported that core retail sales, which exclude automobiles, gasoline, building materials and food services, edged up 0.1% in July. This pause could give the Federal Reserve reason to maintain its lax monetary policy longer than expected.
- St. Louis Fed President James Bullard voiced his support for an interest rate increase by March 2015. “The end of the first quarter of 2015 is still my preferred liftoff date,” Bullard said in an interview with The Wall Street Journal. However, Bullard is not a voting member of the Fed this year and his statements are in contrast to those of Fed Chair Janet Yellen, who has voiced support for an increase in the third or fourth quarter of 2015.
- Eurostat, the European Union’s statistics office, reported that GDP for the euro zone was unchanged for the second quarter from the first quarter, when it rose 0.2%. This was less than the consensus forecast. Eurostat also reported that the German economy shrank 0.2% in the second quarter; France’s economy unexpectedly stagnated; and Italy fell back into recession for the third time since 2008, with its GDP falling 0.2% for the quarter.
- Jobless claims in the U.S. rose by 21,000 to 311,000 last week, the highest in six weeks, the Labor Department reported. This surpassed consensus forecasts. The four-week average of claims increased to 295,750, after hitting a six-year low the week before.
- The Federal Reserve reported that U.S. factory output rose for the sixth consecutive month in July, as manufacturing production rose 1% from June. In addition, the Fed revised June factory output higher to a 0.3% increase. Over the past 12 months, manufacturing has risen 4.9%.
- The producer-price index for final demand increased a seasonally adjusted 0.1% in July from June, the Labor Department reported. Excluding the more volatile food and energy categories, producer prices rose 0.2%. Producer prices were up 1.7% in July compared to a year ago, down from annual gains of 1.9% in June, 2% in May and 2.1% in April.
- The Thomson Reuters/University of Michigan’s preliminary August consumer sentiment index reading came in at 79.2, down from 81.8 a month before. Economists had been forecasting an increase to 82.5. This is the lowest reading since November of last year. The survey’s barometer of current economic conditions rose to 99.6 from 97.4 and was above the consensus forecast of 97.8. However, the survey’s gauge of consumer expectations dropped for a fourth straight month to 66.2 from 71.8, missing expectations.
In terms of the CI Market Dashboard, the iShares Dow Jones U.S. Index Fund (IYY) gained 1.32% this week to close at $98.82. The ETF’s closing price moved sharply off its 100-day moving average, but it may have run into resistance around $99.
To see what happened with the individual Dashboard indicators this week, visit the CI Market Dashboard site.