The Week In Review
8/23/13Monday marked the beginning of a new week for the stock market, yet the story played out much the same way it did during the prior week. Long-term rates continued to rise, the stock market continued to sink, and trading volume remained light. The major averages were mixed and little changed for much of the session, but they broke down in late trading as the technology sector gave up its leadership post and other sectors bowed to selling interest. There wasn't a specific news catalyst for the late-day breakdown, which led some to conclude it was a function of technical factors at work. Outside of some specific names, buyers didn't want much to do with the market. The stocks that benefited were familiar names like Boeing (BA 105.48, +0.34), Johnson & Johnson (JNJ 88.41, +0.81), Google (GOOG 870.21, -3.50), and Apple (AAPL 501.02, -1.94).
On Tuesday, the S&P 500 settled higher by 0.4% to snap its streak of four consecutive losses. Small caps outperformed as the Russell 2000 rose 1.5% after registering five declines in a row. Unaffected by another round of losses across emerging markets, stocks climbed at the open, but gains were limited as the S&P could not retake its 50-day moving average. The benchmark index made a brief midday appearance above the key level before spending the entire afternoon just below it. A retreat in Treasury yields contributed to the relative strength of equities as the benchmark 10-yr yield fell seven basis points to 2.82%. The pullback in yields helped rate-sensitive sectors such as telecom services (+0.5%), utilities (+0.8%), and home builders. The iShares Dow Jones US Home Construction ETF added 3.1% as most major builders gained between 2.0% and 4.0% apiece.
Wednesday's session saw the S&P 500 settle lower by 0.6% despite making a brief appearance in positive territory following the release of the FOMC minutes. Although the minutes from the July meeting offered few changes from prior statements, they did indicate broad support for Chairman Bernanke's timeline, which would likely call for tapering as early as September. However, this was coupled with cautious comments regarding the labor market as the minutes noted, "The June employment report showed continued solid gains in payrolls. Nonetheless, the unemployment rate remained elevated, and the continuing low readings on the participation rate and the employment-to-population ratio, together with a high incidence of workers being employed part time for economic reasons, were generally seen as indicating that overall labor market conditions remained weak." Overall, the minutes did not provide a clear-cut signal regarding the Fed's tapering schedule and the mixed reaction across markets suggests a certain level of uncertainty remains present. The reaction in Treasuries was consistent with expectations of tapering in the near-term as the benchmark 10-yr yield jumped four basis points to 2.86%. The selling had the biggest impact on the belly of the curve as the 5-yr yield jumped more than 6 bps to 1.606%. However, the yield still managed to close just below Monday's two-year high.
On Thursday, the major averages registered gains across the board, but a three-hour halt of all Nasdaq-listed issues prevented normal trading from taking place throughout the afternoon. Stocks climbed out of the gate after upbeat survey data from China and the eurozone reassured investors. China's HSBC Manufacturing PMI jumped to 50.1 from 47.7 (48.3 expected) while the eurozone Manufacturing PMI improved to 51.3 from 50.3 (50.8 forecast). In addition, the Services PMI reading rose to 51.0 from 49.8 (50.2 expected). The economic data provided a boost to growth-sensitive sectors as five of six cyclical groups registered gains larger than 1.0%. The technology sector lagged with an advance of 0.5%. The largest sector component, Apple, ended little changed and Dow member Hewlett-Packard (HPQ 22.40, +0.18) endured its worst session in two years, falling 12.5%, after reporting in-line results and saying it is unlikely to experience revenue growth in 2014.
Friday, the major averages registered modest gains and the S&P 500 retook its 50-day moving average. All ten sectors ended in positive territory after a final-hour surge pulled today's underperformers into the green. For the week, the S&P added 0.3%, Nasdaq rose 1.4%, and the Dow shed 0.6%. Stocks spiked at the open with the technology sector leading the way after Microsoft (MSFT 34.75, +2.36) announced Chief Executive Officer Steve Ballmer will retire from the company within a year. Shares of the software company surged 7.3%, contributing to the outperformance of the Nasdaq, which gained 0.5%. The S&P followed the opening surge with a brief slip into the red after it was reported that new home sales collapsed in July, falling 13.4% to 394,000 from a downwardly revised 455,000 (from 497,000) in June. The Briefing.com consensus pegged new home sales at 485,000. In terms of percentage, the drop in sales was the largest since May 2010 and brought levels down to their lowest point since October 2012. Home builders tumbled in reaction to the data and the iShares Dow Jones US Home Construction ETF (ITB 21.07, -0.55) lost 2.5%. This weighed on the discretionary sector, which ended with a razor-thin gain of 0.02%.
Discretionary shares were also pressured by retailers. The SPDR S&P Retail ETF (XRT 78.89, -0.25) lost 0.3% after Aeropostale's (ARO 8.76, -2.22) earnings report continued the recent trend of disappointing results from teen apparel retailers.
Recent weeks have entertained much discussion over when the Federal Reserve will begin cutting back the pace of its asset purchases. While comments from many Fed speakers have suggested the first taper may occur as early as September, their remarks have often included reminders that the Fed intends to remain data-dependent. To that end, today's new home sales report revealed a notable drop-off in sales, which speaks against tapering in the immediate term.
Treasuries, foreign exchange, and precious metals appeared to agree with this assessment as the benchmark 10-yr yield fell seven basis points to 2.82%. The dollar weakened in the wake of the report while gold futures surged 1.9% to $1396.70 per troy ounce. Meanwhile, silver futures spiked 4.3% to $24.04 per troy ounce. Today's sector leadership was a bit scattered. Three cyclical groups--energy (+0.7%), materials (+0.9%), and technology (+0.6%)--outperformed throughout the day while the remaining three--consumer discretionary (+0.02%), financials (+0.1%), and industrials (+0.1%)--traded in the red until the closing surge. With regard to countercyclical sectors, rate-sensitive consumer staples (+0.6%), telecom services (+1.4%), and utilities (+0.8%) rallied in reaction to the retreat in yields while health care (+0.2%) lagged. Today's trading volume was well below average, and with 572 million shares traded at the NYSE, today's total was one million below the tally from yesterday's session that included a three-hour halt of all Nasdaq-listed issues.