Let’s take a moment and put the market’s current trading action into perspective. Earlier this year bullish sentiment reached levels not seen in years or even decades depending upon data source. Market volatility had also fallen to levels not seen in years as the market was steadily making new all-times highs. S&P 500 actually went 63 trading days without a 1% percent daily move higher or lower. A feat last accomplished in 1995. And it has been more than three years without a 10% or greater S&P 500 correction. This is four times the average duration of time between corrections. Not to mention the market shrugged off tensions in Ukraine, Ebola in West Africa, the rise of ISIS in the Middle East, slowing global growth concerns and the Fed slowly easing up on stimulus. Honestly the market had gotten ahead of itself and was in need of a cool-off period. More likely than not, that is what it is doing.
Yes, weak economic data out of Asia and Europe is a concern as they are major U.S. trading partners, but that weakness has not yet materialized in U.S. manufacturing reports. Just yesterday Industrial Production was reported to have climbed 1% in September. This was better than twice the consensus estimate of 0.4%. This report was further supported by the Philadelphia Fed manufacturing index climbing to 20.7, again besting expectations. Furthermore, weekly initial jobless claims fell to 264,000 last week, the lowest reading since 2000. If business activity was slowing due to weakness overseas, it would stand to reason that weekly claims would be rising, not falling as employers began cutting employees.
Of course U.S. mid term elections are a little over a week away. What Congressman wants to see the S&P500 failing going into that?
75% of companies who have reported thus far are beating estimates although guidance seems lackluster in many areas. CNBS (sic) will intentionally parade the "beats" in an effort to cheer lead promote risk appetite.
Commodities are, for the most part, in a bear market and crude oil is looking like a bearish flag. Another drop lower won't help support the market. To the contrary, any reported fighting near oil fields or disruption in oil supplies could create a vicious short-covering rally. We can only watch the news for this. Not worth a bet.
EU bank stress tests have been released with 20% failing to meet requirements. Are their lows near?
Ebola is also an issue, but honestly it feels as if the media is causing more harm than good. Not so many weeks ago it was ISIS or ISIL that was going to destroy the world, now it is Ebola. The reality is the “outbreak” that they constantly speak of is three patients in the U.S. Unfortunately the medical community was not as prepared as they thought they were. Their initial mistakes and miscues have prompted action and it now appears they are getting better organized to deal with any future patients. A full-blown global pandemic just does not seem all that probable.
Perhaps more than any other issue or concern out there, European markets appear disappointed that the ECB has not done more and in turn Asian and U.S. markets are suffering. Honestly, it is somewhat puzzling that the ECB has not moved from merely words to a more decisive plan of taking action. The region is on the verge of its third recession in six years and deflation is refusing to abate. Sovereign debt levels maybe high now, but deflation and a lack of growth are not going to help this situation at all. Should the ECB step up (which it was rumored they would in January 2015), the current market rout could end just as quickly as it started.
Hat tip Stocktradersalmanac