Reports on consumer confidence and home price data, and the Treasury's $35 billion auction of 5-year notes are events that will be watched by financial markets Tuesday, as investors count down to end of the third quarter.
Monday's tradingwas fairly quiet, with stocks slipping into the close and buyers driving Treasury prices higher. The Dow lost 48 points to 10,812 and the S&P 500 lost 6 to 1142. The 2-year was yielding 0.44 percent and the 10-year was at 2.521 percent. The auction of $36 billion in 2-year notes was well bid. Treasury auctions 7-year notes Wednesday.
Gold crossed the $1300 mark, before trading at $1,297.15 per ounce in late afternoon. Silver also moved higher, rising to a 30 year-high before sliding back to a high it set last week.
Bank stocks were the weakest group, down 1.2 percent, as markets continued to be concerned about the financial state of Ireland and Portugal. Moody's also downgraded Anglo Irish bank by three notches because it said the bank may require government help.
"The problems out of Europe are not ones to be discounted lightly," said George Goncalves, who head Treasury strategy for Nomura Americas. "...the bond market rallied but stocks were only off 6 points. There's a bigger thing going on. Yet the bond marketcontinues to make lower, lows when they're already at the lows.
"Something else is going on. What's driving it? A lot of it is the idea that the Fed will be able to buy you out at a higher price," said Goncalves.
Goncalves said the indecision in markets will remain until the Fed decides what course it will take toward quantitative easing (QE); the outcome of mid-term elections are clear, and tax policy is more certain. "The next six weeks are critical for a lot of the different markets. The volumes are very low. People have little conviction of where we're going . In every market, people have little conviction. We need a catalyst to lift the curtain of uncertainty," he said.
The Fed's quantitative easing program, expected by Fed watchers in November, is likely to focus on the purchase of Treasury securities. The Fed has said it is worried about the economy and unemployment, and the lack of inflation.
The Treasury is issuing $100 billion in notes this week, and Tuesday's auction could be the most difficult, Goncalves said. "I think that today's auction is not indicative of tomorrow. Today was good because people are considering 2-year paper like cash in your wallet. We got into a very sticky spot. The 7-year will do better than the 5-year," he said. "..We're getting to the end of the quarter, people take down some of the risk."
He said big investors buying for indexes will use the 7-year over the 5-year.
The 5-year auction is at 1 p.m. S&P Case/Shiller home price data is reported at 9 a.m., and consumer confidence is is reported at 10 a.m. The Richmond Fed survey is released at 10 a.m.
October Trick or Treat?
September statistically has been the worst performing month for stocks, and many strategists had expected it to be painful. But now that September has outperformed, they've set their sights on October.
Of the half dozen times the S&P 500 gained more than 5 percent in the month of September, the market was mostly higher in October with an average gain of 1 percent, according to Birinyi Associates.
This September, the S&P 500 is up about 9 percent or so, its best performance since 1939's more than 11 percent gain.
There was only one year of the six that ended in a negative return, and that was 1939, when the S&P was down 5.2 percent. World War II was a likely factor that year. That October gained 0.3 percent, and in that September, the market was down 2.7 percent year-to-date. But in all other years with a strong September, the market ended with double digit gains for the year.
There were only two times that October performance was negative after a strong September. For instance in 1997, stocks were up 5.3 percent in September and had been up 28 percent for the year at that point. October was then down 3.5 percent, but the market ended the year with a 31 percent gain. In 1954, the S&P gained 8.3 percent in September, but lost about 2 percent in October. It had a gain that year of 26.7 percent. In the fourth quarter alone, it gained 20 percent.
Jeff Rubin of Birinyi also studied the performance of the market after rallies of the current duration — or 532 days — from the March, 2009 lows. He found four cases, and each time the market continued its move higher. Stocks are up 58 percent since March, 2009. "The take on this is because the market is overbought, over the next couple of days, weeks we could go sideways a bit. We still think there's a positive bias to the upside. For those saying the market is ahead of itself, we would say it is not," he said.
He said the market period that most closely aligns to the current one, started when stocks troughed in August, 1982. By the comparable time in the rally, stocks were up 60 percent. If history is a guide, "longer term the market goes sideways for the next couple of weeks, then continues its upward bias, going up the next year. There are certainly more labored gains going out, but not an end to the bull market, not a significant correction at all," he said.
The dollar edged higher against the euro Monday but slipped slightly against the yen. Dollar/yen was 84.22 in late New York trading. Theeuro was at $1.3471.
The dollar was at its lowest level against the yen since just after the Bank of Japan intervened to push it down Sept. 14, raising speculation the BOJ could return to the market.
Brown Brothers Harriman chief currency strategist Marc Chandler said the volatility has changed the balance in the foreign exchange market. "The point is the euro is more correlated to the stock market right now than the yen is, and we should expect that to continue. It seems the driver is not really risk on/risk off. it's really about interest rates. The Federal Reserve's adoption or the heightened anticipation of QE2 lowered U.S. interest rates, and it's undermining the dollar against the yen," he said.
He said the correlation between dollar/yen and the S&P 500 is about 33 percent, down from the 70 percent it had been at just a few months ago. "It's a not a good hedge any longer...some equities people embrace the currency because its led to diversity in non correlated assets," he said.
What Else to Watch
The circuit breaker system set up on individual stocks after the flash crash still has wrinkles. The stock of Progress Energy fell enough Monday to be halted on the NYSE, but dozens of trades still took place, albeit in milliseconds, after the circuit breaker was tripped. Many of those were at the Nasdaq.
In an interview with CNBC's Maria Bartiromo Monday evening, Securities and Exchange Chair Mary Schapiro said she hopes the SEC report on the May 6 flash crash will be released within the week.
Walgreen reports earnings before the bell Tuesday.
Hewlett-Packardholds a late afternoon analysts' meeting at its headquarters. The company had still not named a replacement for former CEO Mark Hurd.
Barnes and Noble and investor Ron Burkel, who has been waging war against the founding family, face off at the company's shareholder meeting at 9 a.m.
Atlanta Fed President Dennis Lockhart speaks at 5:30 p.m. in Sewanee, Tenn.
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