Blog : Aging Bull or Awakening Bear?

by Ed Zwirn on September 29th, 2014

Expect stocks to take another bumpy ride this week.

The Dow Jones Industrial Average lost 0.7% last week, but that hardly constituted an orderly retreat. The blue-chip index rose or fell more than 100 points each trading day during the week which ended Sept. 26, and it remains an open question whether or not this spike in volatility signals the start of a market correction.

In any case, last week's stock market performance indicated a pullback for the broader market as well, signaling a retreat in risk appetite on the part of investors. The NASDAQ Composite performed in a similarly volatile fashion, retreating 1.8% on the week, while penny stocks, as represented by the Russell 2000 index, slipped even further, losing 2.4%. In addition, in an ominous sign for those reading the charts, both Russell 2000 and the Standard and Poor's 500 have made a so-called Death Cross, meaning that both indices have seen their 50-day moving averages fall below their 200 day performances.

At the same time, the escalating protests in Hong Kong, while probably not the most fundamental geopolitical threat to emerge over the past week, should nonetheless pose a threat to one of the major world financial centers, and this should weigh on stocks, at least as this week gets underway.

Farther into the week, expect the anticipation (and then the reality) of this coming Friday's jobs report to preoccupy markets. The consensus expects the September headline jobs creation figure to weigh in at 210,000, a relatively sharp rebound from August's 142,000.

This follows a week which saw mixed updates on the domestic economic front:

-- Monday saw the release of a report showing August existing homes sales at 5.05 million, lower than both the 512,000 consensus forecast and the revised figure of 5.14 million reported for July. On Wednesday, new home sales for August came in at a much higher-than-expected 504,000, following the revised reading of 427,000 reported for the prior month.

-- Thursday's durable goods orders report for August constituted a train wreck. This key indicator fell by a whopping 18.2%, driven by a poor showing in the transportation sector, after having risen by a revised 22.5% in July. Excluding transportation, durable orders actually rose as expected, following a fall of 0.5%.

-- According to Friday's third Gross Domestic Product revision for Q2, the U.S economy rose by 4.6% during the three months which ended on June 30, up from the previous estimate of 4.2% and the best showing for the broad economy since Q4 2011, when GDP also rose 4.2%. It is significant that the bulk of this upward revision came not from domestic consumption but from investment spending, which increased 19.1% after a previously reported 17.5%. This GDP showing has added pressure to the stock market by increasing the argument of Fed hawks that U.S. central bank monetary policy will tighten sooner than later.

Getting back to the current week, this morning's personal income report came in with the consensus, showing a 0.3% rise for August, following July's 0.2% increase. Personal spending rose by a somewhat larger-than-expected 0.5%, a pickup from the flatline reading reported for July.

Other economic updates to precede Friday's jobs report include:

-- Wednesday's consumer spending update, which is expected to show a 0.4% rise for August, a slowdown from July's 1.8% increase.

-- Also on Wednesday come key updates on the transportation sector. September auto sales will be closely watched for any movement from the 6.2 million reported for August, while truck sales, which last came to 7.9 million, will also be reported.

-- The consensus expects Thursday's factory orders report to show a 9.2% decline for August, following July's 10.5% spike.

But Friday's nonfarm payroll report has the most chance of proving a major market mover. After August's dismal showing, anything less than the rebound expected for September should prove a disappointment. The forecasted rebound notwithstanding, the jobs report is expected to show no more than plodding progress on the labor front, with the unemployment rate holding steady at 6.1%. Similarly, expect hourly earnings to rise 0.2%, the same rate as the prior month, and the average workweek to hold steady at 34.5 hours.

All of these readings, if they come in as expected, should result in nothing more than a minor tweaking of the reading investors have of the outlook for the U.S. economy going forward. But even minor revisions to these domestic numbers could prove problematical to a market which, depending on how you read it, is either in the final phase of an aging bull or a bear emerging from hibernation.

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