Market Snapshot for September 30, 2011:
- Closing Prices: DOW 10,913.38 (-240.60, -2.16%),S&P 500 1,131.42 (-28.98, -2.5%), NASDAQ 2,415.40 (-65.36, -2.63%), Nikkei 225 8,700.29 (-0.94, -0.01), DAX 5,502.02 (-137.56, -2.44%), FTSE 5,128.48 (-68.36, -1.32%)
- OIL 79.20, GOLD 1,622.30, SILVER 30.083
- EURO 1.3384, YEN 77.04, BRITISH POUND 1.5582, U.S. DOLLAR INDEX 79.075
The End of a Disappointing Quarter
It was a nasty summer for the markets with the indices posting their worst quarterly losses in nearly three years. The Dow Jones Industrial Average ($DJI) shed 6.03%, the S&P 500 fell 7.18%, and the Nasdaq Composite ($COMPX) ended the quarter lower by 6.36%. With the exception of the final quarter of 2008, the last time the S&P 500 had seen such a drop was nine years ago.
What will the Future Bring?
Back in 2008 I was asked by one individual a question seeped in hope: "When will this market recover?" My response was not quite what they wanted to hear: "It will likely take a good ten years or so before we see the Dow able to have a chance at truly breaking 'last' year's highs." It's been just over three years and about a third of the way to that point and we haven't seen anything yet to change that outlook.
Dow Jones Industrial Average (Figure 1)
Figure 1 displays a weekly chart of the DIA (Dow tracking stock), which shows the price action in the Dow over the past six years. In 2008 a modest correction in the Dow (and market as a whole) intensified after striking strong monthly resistance levels. The magnitude of the selloff was so extreme that it made it quite difficult for the index to mount a comparable reversal in terms of momentum or pace. Instead, the market has pulled higher, but the pace of that upside was almost half of that seen in the selloff.
This type of recovery tends to have an exceptionally difficult time breaking through prior highs without at least one more selloff on the same time frame that lasts as long as the previous wave of buying. When an attempt is made prior to that time, it generally serves as a bull trap and the prior high will "break" only briefly, but without conviction, before selling off sharply once again. This was seen on a smaller scale back in 2007 with the July and October highs whereby the October high was slightly greater than July's.
It is common for each wave of buying and selling past the initial high in this type of pattern to have two to three smaller waves within them. Two is the most common when in a trading range, however, and the Dow just completed its second wave off 2009 lows heading into summer of this year. Since the pace of the selloff from July into August was once again stronger-than-average, we should again expect the market to have a difficult time recovering and pushing through the 2011 highs, making it even more unlikely for the 2007 highs to be breeched over the next several years.
Dow Jones Industrial Average (Figure 2)
It typically takes two larger waves of buying and two waves of selling for the market to break free of the type of trading range we are experiencing now on a monthly time frame in the Dow. When I first offered my "10-year prediction" it was based upon the assumption that this would be the case for a "best case scenario" and that the subsequent moves after a selloff such as in 2007-2008 will usually be more gradual than the first selloff itself was. As a result, I wanted to take into account the approximate time it would take to accomplish this type of pattern development.
There is still a lot of time left for the market to continue on its path of recovery and there is still a lot of time for the current price action to change. This includes change to a more pessimistic view point. While it is certainly probable that it can take another 6+ years for this action to develop to a point where the market can safely break to new highs without failure, it may still not do so at that time. Instead, the momentum of each of the subsequent moves on the upside can continue to slow, leaving the market stuck in a much longer term period of correction off that 2007 level. This is what happened on the daily scale after pulling off those same 2007 highs.
This failure is more common if the market does attempt a new high on a second test of highs, which is one very good reason to go against wishful thinking of a break higher into next year in favor of the market holding this larger monthly range for now if you are a longer term bull. For the time being, however, the market is at strong weekly support and is currently favoring the shorter-term traders over the position traders or investors. In fact, if you have been focusing almost purely on day trades for the time being, this type of volatility has been ideal. The intraday ranges have been wide compared to several months ago and for the most part we've seen smooth trend moves on the 15 minute time frame with smaller positioning moves on the 5 minute.
S&P 500 (Figure 3)
The Dow Jones Industrial Average ($DJI) ended the day on Friday with a loss of 240.60 points, or 2.16%, and closed at 10,913.38. Twenty-nine of the Dow's thirty index components posted a loss as the market once again reversed course into the weekend. The only gainers was Merck (MRK) with a fractional gain of only 0.12%. The top decliners were Hewlett Packard (HPQ) (-5.59%), Alcoa (AA) (-4.87%), JP Morgan Chase (JPM) (-4.05%), and General Electric (GE) (-4.04%). The Dow ended the week higher by 1.32% despite the selloff in the second half of the week thanks to a strong start on Monday and into mid-day Tuesday. Nevertheless, it ended the week lower by 6.03% and had its weakest quarter in nearly three years with a loss of 12.09%. It is down 5.74% year-to-date.
The S&P 500 ($SPX) finished the session with a loss of 28.98 points, or 2.5%, and closed at 1,131.42. Only twenty-seven of the index components in the S&P 500 managed to end the day in the black. The top percentage performers on Friday were Dr Pepper Snapple Group (DPS) (+1.62%), Tyson Foods (TSN) (+1.46%), and Altera Group (MO) (+1.40%). The weakest performer was Micron Technology (MU) (-14.14%) after reporting a quarterly loss when analysts had anticipated a profit. Other top decliners included CF Inds. Holdings (CF) (-12.45%), Ingersoll-Rand (IR) (-12.11%), and Morgan Stanley (MS) (-10.47%). The index finished the week lower by 0.44%, while it ended the month lower by 7.18% and the quarter lower by 14.33%. It is lower by 10.04% year-to-date.
The Nasdaq Composite ($COMPX) ended the session lower by 65.36 points, or 2.63%, on Friday and it closed at 2,415.40. The strongest performers in the Nasdaq-100 ($NDX) were Sirius XM Radio (SIRI) (+1.34%) and Teva Pharmaceuticals (TEVA) (+0.76%). Only six of the 100 index components managed a gain. The top decliners were Micron Technology (MU) (-14.14%), NII Holdings (NIHD) (-8.64%), Wynn Resorts (WYNN) (-8.33%), and Priceline.com (PCLN) (-5.97%). The Nasdaq Composite ($COMPX) ended the week lower by 2.73%. It ended the month lower by 6.36%, the quarter lower by 12.91%, and is down 8.95% year-to-date.
Nasdaq Composite (Figure 4)
One of the areas that market participants have failed to draw hope from over this past quarter has been the very mixed economic data. The data from this past week has been disappointment focusing upon the state of the housing market. A recent survey even shows approximately half of the bank risk managers that responded expect housing prices to reach 2007 levels by the end of the decade. Only 27% thought they actually would.
Despite widespread pessimism on the state of the economy, consumer sentiment actually improved last month despite the first decline in personal income last month since October 2009. Friday's Thomson Reuters/University of Michigan's final September reading on consumer sentiment came in at 59.4 on the index compared to 57.8 earlier in the month. Analysts were expecting that number to remain unchanged. It was at 55.7 at the end of August. News over this past week has centered strongly upon President Obama's bill focusing upon job creation and this could have helped provide that added push in sentiment, although many argue that the bill is quite limited and will do little to stir longer term growth.
Jobs growth will remain on center stage in the week ahead. On Friday the government will release September's nonfarm payrolls data, along with the most recent unemployment rate, hourly earnings, and the average work week. The unemployment rate is expected to remain unchanged at 9.1% with very little net gain in the real employment data.
Although earnings season won't really kick off until next week with the release of Alcoa's quarterly earnings, a few names to keep an eye on this week will include Yum Brands (YUM) on Tuesday, Costo (COST), Marriott Intl. (MAR), and Monsanto (MON) on Wednesday, and Constellation Brands (STZ) on Thursday.
Unless otherwise stated, the index action described in this article relates to the E-mini futures contracts for the respective indices. Actual index action may differ slightly in terms of pattern formation, although the market bias will remain the same.
Toni Hansen is president and co-founder of the Bastiat Group Inc., DBA Trading From Main Street. Toni is one of the most respected technical analysts and traders in the industry. She has been trading and educating new traders, money managers, professional market analysts and traders throughout the boom and bust of the last decade. She has worked in conjunction with some of the world's top financial exchanges. Learn more about Toni Hansen and the educational services she provides through her website at http://www.tonihansen.com.