State of the Stock Market Analysis for the Week Ending October 11th, 2014 (The Stock Market Saw Goblins This Week 10-11-14)
In staying with the Halloween theme, the stock market saw more than its fair share of goblins this week, and while the bulls were looking for a strong upside close on Friday, they were instead spooked quite a bit. The Volatility Index (VIX) spiked Friday above 22, before closing out the day above 21. Thus, it is clear that the ghosts of Octobers past are swirling through the Canyons of Wall Street. It was a roller-coaster week, and when the dust had settled on Friday, we saw weekly losses of 2.7% for the Dow, 2.3% for the Nasdaq and 3.1% for the S&P 500. That puts the Dow in negative territory year-to-date, so you can see why investors are more than a little worried right now.
The perplexing part about this week, however, is the fact that it just seemed so strange. It is amazing how a six-year-old bull market can make investors feel as though the stock market is bullet proof. Down weeks have become a rare occurrence, as have volatile weeks for that matter. The spark for this week’s weakness came from some second-guessing of the Fed’s comments in their “minutes” from last month’s meeting, and that downside spark also came from growing concerns over a broader slowdown in the global economy. Earnings season is also on investors‘ minds, and so far the numbers have been mixed.
It is always a challenge to put all of the puzzle pieces together to explain a big market selloff or soaring volatility, and there were plenty of variables in play this week. The price of oil has been falling sharply, and we saw prices hit their lowest levels since November of 2012. A “flight to quality” also has pushed the yield on the 10-year Treasury down to around 2.30%, which in turn, has pushed 30-year mortgage rates back below 4% (according to “Zillow Mortgage Tracker’ on Friday). Low oil prices and low interest rates should be great for the economy, but by the reaction of the stock market this week, all is not as fine and dandy as we might think.
Maybe it is just because it is October, but the question arises as to what else might be amiss. The Semiconductor Index (SOX) was walloped on Friday on some weak earnings results in that sector, and seeing the SOX drop nearly 7% in a session weighed heavily on market sentiment, and on the tech-heavy Nasdaq as well. It has been a long time since a sink in the SOX has drawn much attention, and for that reason, it is probably worth paying some attention to the selloff that the semiconductors saw on Friday. The semis can sometimes be a “canary in the coal mine,” so we will monitor this sector in the days ahead.
One of the biggest worries for the bulls this week was the damage done from a technical perspective. All three of the major indices are at or near their respective 200-day moving averages that include 16,541 for the Dow, 4,276 for the Nasdaq and 1,900 for the S&P 500. It seems as if only yesterday that we dipped below the 50-day moving averages, but here we are suddenly worrying about 200-day moving averages. This presents a big challenge on Monday once we are back in action, so you can bet that the bulls will be looking for a bounce.
All eyes have been on the small-cap Russell 2000 in recent weeks and months, and it had some big troubles again this week and on Friday. The Russell closed Friday at 1,067; below both its 50-day moving average of 1,132 and its 200-day moving average of 1,131. From a technical perspective, a bounce is needed soon in a big way. This sets us up for a challenging week next week for the Russell, as well as the broader market averages. Octobers can be “rough and tumble,” but they can also set the stage for major reversals. Bulls are hoping for that sort of “bounce scenario” next week, so stay tuned as we head toward Halloween.
October is still one of the most beautiful times of year, and the Gorilla hopes each and all enjoy it despite the sudden “October Vibe” in the air for the stock market. This bumpiness will likely pass quickly, although the volatility levels might linger a bit. It is a healthy development, though, and the last thing we need to worry about is the end of the Federal Reserve bond purchases. Janet Yellen might be back out next week reassuring investors in a big way, so stay tuned, as this current “slight” correction unfolds. Again, have a great weekend, and we will be back in action on Monday!
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