(This contribution was from yesterday. Sorry for the delay in posting it).
After four winning weeks in a row took the market nearly 20% off its early October lows, the bulls finally ran out of gas. Stocks closed 2.5% lower last week. Yet, even that dark cloud has a silver lining around it.
We’ll look at that silver lining in a second. First, let’s dissect last week’s economic data… there’s quite a bit of it.
Buckle up – there’s a lot to get through (and we won’t even be discussing all of it).
First, and perhaps foremost, the unemployment rate edged lower from 9.1% to 9.0%. And, though not as briskly as September’s growth rate, October’s net payroll growth from the private sector increase by 104K jobs. The ADP number jives with that net job growth. The ongoing claims level also dropped a little last week, while the new claims number last week slipped from 406K to 397K. Given that the 400K mark seems to be a key psychological level, this is as significant milestone… even if it’s been hit multiple times in the last year.
Critics will add a footnote that the unemployment rate and unemployment claims are only ticking lower because there’s just nobody left to layoff, and unemployment benefits are running out. While that was true at one point, there are some numbers here you’re not hearing that confirm the employment situation is legitimately getting better.
Simply put, the number of employed Americans – on private payrolls – is rising. It has been for more than a year. In February of 2010, only 129.2 million Americans were working, and now there are 131.5 million.
It doesn’t seem like a whole lot more, and it’s still shy of the peak 137.9 million workers from February of 2008. But, that’s actually a pretty respectable improvement.
Point being, there’s truly a reason for hope here. The ‘ideal’ employed total (for the market) would be somewhere around 134 million, with new weekly unemployment claims coming in at 200K or lower, with monthly job growth at 200K or more. We’re not there yet. However, we are inching our way there on all fronts.
Monthly Unemployment Rate, Payrolls Added, Employed Americans
The other ‘biggie’ for last week was on the productivity front. Factory orders were up 0.3%, versus an expected decline of 0.2%; it was the second month of growth, albeit tepid growth. Productivity for Q3 is also likely to come in at 3.1%. Both ISM Indices came in a little lower for October, as did the PMI Index. It doesn’t exactly scream ‘robust’, and we need some help in the manufacturing arena.
The coming week should be less eventful than last week. In fact, the only items of real consequence are Monday’s Consumer Credit levels and the Michigan Sentiment Index on Friday.
Consumer Credit has little direction to go but up after September’s $9.5 billion dip. The experts foresee something of a $5 billion increase, which is in line with almost every month since late 2010. As for the first Michigan Sentiment Index reading (of 3) for November, we’re probably going to see slight uptick from 60.9 to 61.5. It’s not that big of a deal, but it’s better than a step in the other direction.
There’s no denying it at this point – the market is over all of its key hurdles. Namely, the mess of moving averages (20, 100, and 200-day lines) around 1230, which was also the key ceiling from August through October. Now it’s a floor, with all those moving averages serving as a bullish rebound point for the last three days of last week.
It’s also worth adding that Friday’s mild loss was made even more mild by the intraday rebound, which is pretty impressive given the scenario – traders tend to file out of stocks before a weekend. Better still, Friday’s dip was a low-volume effort to begin with.
There’s something else going on here though… something less specific, and more subjective.
See how the Bollinger bands for the S&P 500 Index (SPX) (SPY) as well as the CBOE Volatility Index (VIX) (VXX) (VXZ) are starting to squeeze together at the same time they’re changing values? For the SPX this is an upward shift and consolidation, while for the VIX the whole shebang is moving lower. Yeah, well, this is as much of a clue of a true paradigm shift as the cross above moving averages is (and perhaps more so).
We only bring it up because the Bollinger bands are apt to be the new ebb and flow (reversal) points, and we need to know it before we got spooked by a nasty (or fortunate) reversal. The S&P 500 will/should hit resistance around 1285, where its upper band line is. Likewise, it will/should hit a bottom around 1178 – at the worst – if any pullback takes hold. That’s still bullish, as it’s still higher highs and higher lows.
The same goes for the VIX. We’re still apt to get some up and down, but now that it’s in a falling channel, that’s bullish for stocks. [Eventually the falling channel will completely guide the VIX under the pivotal 30 level.]
And in both cases, since we know how periods of low volatility are followed by periods of high volatility (and vice versa), this constricted volatility from the market we’ve seen develop as of last week is actually setting up an explosive move sooner or later. The vibe is that it’ll be bullish.
Bottom line? We’re bullish. The index may follow-through early this week up into the 1285 area, but even if it doesn’t get started with an immediate rally, the floor’s in place to reignite it quickly. Even a tumble under 1230 could still be halted by the floors around 1196, where the lower Bollinger band line would be by the time it could be intercepted.
SPX & VIX Daily Chart
Though earnings season isn’t completely over yet, it’s over enough to go ahead and start grading the results. And the verdict is? Not bad – and much better than expected.
At the beginning of earnings season the consensus was that the S&P 500 would earn $24.07. With 83% of the S&P 500’s companies having posted last quarter’s results, the index has actually earned $25.17. And, giver how we’re getting the usual 70%/20% beat/miss ratio, the figure is only likely to get larger – not smaller – than $25.17 from here.
That brings the trailing P/E ratio for the S&P 500 up to 13.4. It was in the upper 12’s just a couple of weeks ago. Still, that’s at rock-bottom lows compared to the 20-year average of around 18.0.
More than that though, while analysts have reeled in their outlook for 2012, S&P still foresee the market reaching record earnings levels in the coming year. Between that outlook and Q3’s surprising earnings success, the very long-term bias still remains to the upside despite the fear that August’s implosion fostered.
S&P 500 Earnings