Expect increased volatility during the first full trading week of October along with equity declines. A string of negative economic data and falling Treasury yields could pressure what might turn out to be a technical top for the S&P 500.
Though the S&P 500, Dow Jones, NASDAQ and Russell 2000 all gained as last week's trading activity came to a close, on a weekly basis, stocks still extended a selloff. As well, for a third consecutive week, cyclical sectors led the selloff, while yields slumped over the same period.
Back-to-back negative economic reports, including from ISM, unnerved traders, resurrecting the narrative that the U.S. was set to join the global economic slowdown. Red flags were raised in particular when the ISM manufacturing PMI contracted for a second straight month. While the services index dropped as well, it remained in positive territory.
However, the case for continued growth was made on Friday when the monthly nonfarm payrolls report was released. Though job creation came in below expectations and average hourly earnings slipped, the U.S. unemployment rate fell to 3.5%, its lowest since 1969. This, more than anything else is what the Fed looks for, as a spur continued consumer spending growth, and what the country's GDP relies on.
Nevertheless, speculation still runs high for another interest rate cut this month, even as the jobs release calmed growth fears, creating a dissonance in the market narrative. Lately, the market has been selling off on positive economic data, which is seen to reduce chances of additional Fed cuts, while rallying on negative data releases, viewed as increasing the outlook for lower rates.
The current narrative persists however, on expectations of further cuts after Fed boss Jerome Powell said on Friday that the economy “faces some risks” but is “in a good place” overall.
SPX Heading For a Top?
Over the shorter term, on Friday, the S&P 500 advanced for a second day, the best performance in seven weeks—led by the Technology sector after reports out of Japan were released that sales of Apple's (NASDAQ:AAPL) newest iPhones beat expectations.
From a technical perspective, the S&P 500 is in the midst of a return move before topping.
Yields on the U.S. 10-year Treasury note declined for the seventh straight day on Friday, falling to within 6 basis points of the Sept. 3 low, the lowest since July 2016. We're once again seeing a short-term dichotomy between bonds and stocks, which—if our S&P chart analysis above follows through— will correct itself within the medium-term.
Though still well above its uptrend line since June, the dollar fell for a fourth day on Friday. However, the RSI is warning the price might fall below its uptrend line, as momentum provides a negative divergence in the form of a developing descending triangle.
Bitcoin broke the downside of a rising flag, bearish after the sharp preceding decline, and doubly bearish after completing a descending triangle.
Oil rebounded on Thursday, bouncing off the lows since June, closing higher on Friday, toward $53.
Week Ahead
All times listed are EDT
Tuesday
8:30: U.S. – PPI: expected to remain flat at 0.1% MoM.
Wednesday
10:30: U.S. – Crude Oil Inventories: likely to plunge to 1.567M from 3.100M.
14:00: U.S. – FOMC Meeting Minutes will be released, providing greater clarity on the votes for the Fed's most recent interest rate decision.
Thursday
4:30: UK – Manufacturing Production: predicted to fall to -0.1% from 0.3%.
8:30: U.S. – Core CPI: probably edged down to 0.2% from 0.3% during September; the headline rate is expected to remain flat at 0.1%.
Friday
8:30: Canada – Employment Change: seen to plunge to 7.5K from 81K in September