With stocks having been down six of the last seven sessions, it is hard to argue that the short-term trend is anything but negative.
The S&P 500 (SPY) is below its five-day moving average, and the five-day is now below both the 10-day and 18-day moving averages. And, with Congressional leaders still miles apart on a deal to avert a government shutdown, it appears that the recent trend could continue for a while.
The Latest in the D.C. Drama
The latest update on the drama is the House has passed a new Continuing Resolution which, if passed by the Senate, would keep the government funded through Dec. 15. The GOP-led measure offered up a compromise by backing off their prior position of "defunding" Obamacare, proposing instead to delay the implementation of Obamacare for one year and repealing the tax on medical devices intended to fund the so-called health care reform law.
While this would appear to be relatively good news on the surface, it is important to recognize that there is no chance that this bill will be approved by the Democratic-controlled Senate. In addition, the White House has made it clear that the President will not enter this debate, except for the occasional press conference filled with name calling and finger pointing, of course. As a result, the popular press suggested Sunday that a government shutdown looks likely.
How Will Stocks React?
So how does this development impact stocks? Based on the recent action, probably not in a good way. However, the coming week could certainly provide any number of catalysts for stocks to move in either direction. For example, the deadline for a government shutdown isn't until Tuesday (which is like a year in Washington terms). As such, the bulls argue that a deal could still get done. And if a government shutdown doesn't happen, those wearing the rose-colored Ray Bans suggest that stocks ought to reverse course and test the upside of the recent range.
On the other side of the aisle, the bears contend that even if a deal to keep the government running is somehow reached, the debt ceiling still needs to be addressed. Recall that Treasury Secretary Jack Lew announced last week that the government will run out of cash on Oct. 17. Thus, any celebration tied to avoiding shuttering most of D.C. could be short-lived.
While all eyes are on D.C. at the present time, we need to keep in mind that the coming week is also chock full of economic data, including the "Big Kahuna," the September Jobs Report slated for release on Friday morning at 8:30 a.m. eastern daylight time (give or take 10 to 20 milliseconds, of course). As usual, this will be the most scrutinized number on the planet due to the fact that the FOMC is targeting the unemployment rate as a trigger to changes in the Fed's monetary policy.
But before the nonfarm payroll totals and the unemployment rate are announced, traders will get a peek at the Chicago Purchasing Managers Index on Monday (the August reading was 53.0), the ISM Manufacturing Index and Construction Spending reports on Tuesday (analysts are looking for a reading of 54.0 on the ISM Manufacturing Index vs. 55.7 last month), ADP Employment (e.g. private-sector job creation), and then Initial Jobless Claims, Factor Orders and the ISM Non-Manufacturing Index on Thursday. So, it ought to be an action-packed week to say the least.
What Do The Indicators Say?
When the outlook for the market becomes cloudy, it is usually a good idea to turn to the indicators for clues as to status of the current environment. Below is a brief rundown on some key indicators.
Bond Yields: The bond market can often be a key "tell" as to the outlook for the economy, inflation and Fed policy.
10-Year T-Bond Yield - Daily
The key takeaways from the chart of the 10-year yield are (a) the recent "taper tantrum," which caused yields to spike appears to have ended and (b) rates have settled down to more normalized levels over the past month. However, the move has not been "emotional" and as such, there does not appear to be any panic in the air at the present time in relation to the games being played in Washington.
Big Picture Models: These models are designed to provide a read on the overall environment from a "big picture" standpoint. Coming into this week, the overall reading of the model was neutral with five of the indicators positive, four negative and one neutral. Here's the rundown:
- Trend/Breadth Confirm Indicator: Moderately Positive
- Cycle Composite: Moderately Positive
- Supply/Demand Volume Relationship: Positive
- Sentiment Model: Negative
- Economic Model: Negative
- S.T. Trend: Negative
- Intermediate-Term Trend: Positive
- State of Industry Groups: Positive
- Risk/Reward Model: Neutral
- Monetary Model: Negative
One of the keys to long-term success in the market is to remove emotion and stay objective. This is where a disciplined, rules-based, repeatable process comes in. And based on the status of some key indicators/models, the overall "big picture" environment appears to be neutral. However, it is important to recognize that there are a fair amount of cross-currents at the present time, which indicates that a flexible stance is recommended.
Mr. David Moenning is a full-time professional money manager and is the President and Chief Investment Strategist at Heritage Capital Management. He focuses on stock market risk management, stock analysis, stock trading, market news and research. Click here to claim a free copy of Dave's Special Report on changes in the current market.
About the author:
Dave and Donald Moenning