Tuesday Preview: Stocks to Seesaw, Economy in Focus
Seesaw moves in the stock market have not discouraged some strategists who believe the market remains in an uptrend, despite near-term choppiness.
Stocks Monday rose early on a strong ISM report and a surprise profit from Ford, but they gave back a triple-digit gain at midday as the financial sector came under selling pressure. But buyers stepped in, taking stocks from negative levels to gains once more. The Dow finished the day at 9789, up 76, and the S&P 500 rose 6 to 1042. Financials ended higher, up 0.8 percent, even as Citigroup, which led the decline, finished lower.
Monday's intraday move though was volatile but mild compared to the sharp snap up last Thursday on Q3 GDP, and the big let down Friday when the Dow lost 249 points after a weak consumer spending report.
Monthly auto sales, factory orders and dozens of earnings reports, from such names as UBS, Archer-Daniels, Marathon Oil, Viacom and MasterCard, could influence trading Tuesday. The Fed also starts its two-day meeting, which concludes Wednesday with its 2:15 p.m. statement.
Investment strategist Richard Bernstein said the market's choppiness is normal and it should continue.
"We have a market that was expecting improvement in the economic numbers more rapidly," he said, adding the market could continue to trade up and down with the health of the economic statistics for now.
Bernstein, CEO of Richard Bernstein Capital, said he's been bullish since early summer, and he's still bullish but he's not a "raging bull."
Traders have been speculating for days now that the Fed may take some steps this week to show it could tilt toward a higher rate environment in the next couple of months. But Bernstein believes the Fed will remain on hold and keep the language in its statement on hold as well for some time to come. The low rate environment has been one of the big drivers for stock.
"They have removed the risk of systemic bank failure but they haven't focused on restoring normal credit in the economy," he said.
Fed watchers have also said the Fed is not likely to make a move or drop the language that it will keep rates low for an "extended" time until it sees improvement in employment. This week is also the week that unemployment could potentially break the 10 percent level, when the October employment report is released Friday.
Laszlo Birinyi, who has also been bullish, said he still believes the market remains in an uptrend, but it could be choppy for now. "My view all along is the gains that we had were totally unsustainable. I wasn't necessarily looking for a decline," he said.
"I think we continue to go higher, but in a lot of a less smooth fashion than we have," he said in a brief interview.
Birinyi said the market's behavior reflects a general realization that the gains have been significant. "A lot of stocks had a lot of moves. You have the bulk of earnings behind us. There's a lot of realization that we've made some very historically stretched gains over a short period of time. It wouldn't be bad to sit out a round or two," Birinyi said.
Birinyi said the market continues to have strong underpinnings. For instance, it is resilient and has been able to stand up, even in the face of bad news. He is telling investors though that it is not a time to be aggressive.
As the stock market moved up Monday, the dollar slipped against a basket of currencies. The dollar lost ground against the euro, to a level of $1.4766 per euro, but the yen slipped against the dollar. In the Treasury market, sellers came in on the stronger economic report, pushing yields higher along the curve. The 10-year was yielding 3.424 percent, and the two-year was yielding 0.921 percent.
MKM chief economist Michael Darda said Monday's ISM reading and the rapid rise of the ISM index during the last four months is more consistent with a V-shaped recovery than a U-shaped recovery. ISM was reported at 55.7 for October, its highest reading since April, 2006.
In a brief interview, he said he tracked the ISM in recessions since 1960. "If you look at the ISM as it relates job growth, there's an important correlation coming out of every recession since 1960. When the ISM crossed above 55, the three month moving average for non farm payroll growth was positive, except for 1960, and it went positive the next month," he said.
Darda said he is looking to adjust his outlook for non farm payrolls for October, but will do so after ISM nonmanufacturing data is released Wednesday. Friday's employment report is the next big data item markets are looking ahead to, and the consensus is for a loss of about 170,000 non farm payrolls.
"We were at -150,000, but it might be even better than that," he said.
"Folks who are saying it's different this time, well it's not different this time..payrolls this week should be interesting. We'd hope and expect to see a significant tapering off of job losses. The indicators that would tend to lead have been doing what they should be doing," he said.
"I think people have been way too quick to judge this recovery based on temporary government stimulus factors. I think there's an underlying real estate recovery here that goes beyond the the tax credit. I think there's an underlying auto recovery that goes beyond clunkers," he said.
"This has V-shaped recovery written all over it," he said. "The deeper the recession the stronger the bounce back."
Citigroup economist Steve Wieting said ISM was encouraging on a lot of levels, including the 7-point jump in the employment index to 53.1. But he said there's one aspect of the report that causes some concern. "The fact that the production readings eclipsed the order readings is not good," he said.
"The orders index has slowed its growth rate for the past two months," he said. "I would argue that the very sharp snap back that you saw in manufacturing in the third quarter, that you don't accelerate it."
"I think we're headed to plenty of more growth in manufacturing output. That's going to be uninterrupted, but the speed of the recovery is showing signs of exhaustion," he said.
Auto sales are expected to top September levels when they are reported individually by manufacturers throughout the day Tuesday. Wieting expects sales to show a 10.4 million annualized rate.
He too expects the Fed to hold off from making any moves when it meets this week.
Earnings reports are also expected Tuesday morning from American Tower, Emerson Electric, Intercontinental Exchange, Och-Ziff Capital, Cameron International, Amerisource Bergen, Rowan Cos, Health Net and Cognizant Tech. Kraft and Hartford Financial report after the close.