For the week ending September 26, 2014, the markets continue to fall as institutions are selling to take profits before the quarter ends. While the economy is improving, public pensions face a $2 trillion hole. And, the U.S. and its allies attack ISIS controlled oil fields in Syria. Below is a recap of the markets for each day of the week.
The markets retreated on Monday following a disappointing existing home sales report and a negative national activity index (due primarily to a drop in auto-related factory shipments). The Dow fell -0.6 percent.
On Tuesday the markets fell again on mixed economic news (positive data from Markit and the Richmond Fed; negative data from FHFA home prices underscoring yesterday’s weak existing home sales). The Dow fell another -0.7 percent.
On Wednesday, after two down days, bargain hunting drove the Dow sharply up by 0.9 percent on the heels of a very strong new home sales report plus dovish comments from Chicago Fed president Charles Evans.
The Dow dropped a sharp -1.5 percent on Thursday as big sell orders were placed from institutions taking profits before the end of the third quarter. This left the Dow below 17,000 at 16,945. Rumor has it that a central bank in Europe sold U.S. stocks to lock in currency profits, and this triggered sell programs. Economic news for the day was good, with durable goods solidly higher and dovish Fed Speak from Atlanta Fed president Dennis Lockhart.
On Friday, the Dow did an about-face rising 1.0 percent, again on bargain hunting. The Dow closed above 17,000 at 17,113. Economic news (GDP and consumer sentiment) was as expected.
As we approach October (historically known as the month for corrections), the markets are getting more volatile; the SPX volatility percentile is now at 41 percent. While September is also know for increased volatility, the VIX in October averages 12 percent higher than September. Why October is the most volatile month remains a mystery.
In less than a decade, public pension fund debt has tripled to at least $2 trillion, representing more than half of all outstanding state and local bond debt combined. Moody’s reviewed the unfunded debt of the largest 25 public retirement funds covering 40 percent of the $5.3 trillion in pension fund assets, and found that their assets dropped 22 percent in the years 2008 and 2009 alone. What is causing the shortfall? The states have been underpaying their share for years.
ISIS has become the wealthiest terrorist organization, according to U.S. intelligence, pulling in as much as $3 million daily from illegal crude oil sales. The U.S. led airstrikes in Syria targeted some of the oil fields under ISIS control in an attempt to curtail their revenue stream. ISIS overruns an area to seize its oil fields forcing local workers to continue production. It is estimated that ISIS now controls over 60 percent of Syria’s oil production capacity (more than 200,000 barrels daily potential). Who is buying this illegal oil? The over 8 million people living under ISIS control, and Turkey (where the oil is refined).
The bottom line: the word internationally is that equities declined due to: investor concern over global growth prospects; and geopolitical concerns in Ukraine and Syria. Economic news this past week was rather thin, but next week there is an abundance for investors to monitor.
Globally, topping the list are the ECB and Mario Draghi’s press conference, followed by manufacturing and composite PMIs, international trade data for Canada and the U.S., second quarter growth data for the UK.
In the U.S., the economy in the U.S. for the second quarter was strong, but the third quarter is looking mixed to poor. By sector, manufacturing shows moderate growth while housing is slowing. Despite a sluggish growth in jobs, consumer sentiment remains positive. The expectation is for the third quarter to show a slowdown.
The focus next week in the U.S. are the employment situation (jobs report and unemployment rate) and housing (pending home sales and the Case-Shiller report).
Year-to-date the markets are up: Dow 3.2%; S&P500 7.3%; Nasdaq 8.0%.
The Markets for the past week were: DJIA down -1.0%; S&P500 down -1.4%; Nasdaq COMP down -1.5%.
Commodities (ETFs) for the past week were: Gold (GLD) down -0.03%; Silver (SLV) down -1.69%; Oil (OIH) down -1.65%; Dollar (UUP) up 1.11%; 30-yr Bonds (TYX) dropped 6 basis points to 3.22%.
The VIX this past week (a measure of market sentiment and volatility) rose to 14.85% as institutional profit taking and geopolitical concerns cause large market gyrations.
To see what’s on the calendar for next week, go to the Econoday calendar.
The economic calendar for next week is full: on Monday – Personal Income and Outlays, Dallas Fed Mfg Survey; on Tuesday – S&P Case-Shiller HPI, Chicago PMI, Consumer Confidence; on Wednesday – Weekly EIA Petroleum Status Report, Motor Vehicle Sales, ADP Employment Report, PMI Mfg Index, ISM Mfg Index, Construction Spending; on Thursday – Weekly Jobless Claims, Factory Orders; and Friday – Employment Situation, International Trade, ISM Non-Mfg Index.
If you’re trading options, we suggest Put Credit spreads for next week at 2+ standard deviations or greater. Expect the price of the SPX to fall within 1902 and 2066 (2 standard deviations).
For more information about options, see the ‘Suggested by the author’ links below.