Many investors were shaken by Monday’s mini-crash as sentiment turned the most bearish it’s been in nearly a year. Sentiment levels like these often coincide with steady rallies as the market climbs the famous ‘wall of worry,’ which may occur over the next couple of weeks. The Chinese credit market, debt ceiling votes, a potential US debt default, and stimulus deals will all be major market moving events in the next 1-4 weeks. Watch for the SPX to make a decisive move soon as it approaches 4,500 – trend line resistance. Expect large swings and twin-sided price action in major indexes over the next three weeks with equities remaining range bound, SPX 4,150-4,500.
This past week’s economic releases were mixed, though with a jump in the number of new jobless claims. The Markit manufacturing and services PMI’s both came in lower, but both sectors remain in positive trends and the strength of the U.S. economy continues to build. Despite the uptick in mortgage rates, the housing market showed signs of strength with building permits, housing starts, new home sales, existing home sales, and the Housing Market Index all beating expectations. The Fed’s taper schedule remains a short term risk for markets surrounding the next Fed meeting in early November.
While short-term technicals on Monday were inflicted with significant damage with all of the major indices dipping below key support levels, the late week rally healed some of that damage. The S&P 500 and the Nasdaq are back above their 50-day moving averages, and while the Dow is still below its short-term moving average, the benchmarks are all well north of their 200-day moving averages. Small-caps had another wild week, but after crashing on Monday, the Russell built up relative strength as the week progressed, closing above both its moving averages on Friday. The Volatility Index (VIX) soared to a four-month high on Monday, getting close to the 30 level, but the fear gauge dropped back below the crucial 20 level following the Fed’s announcement.
The month will end with another busy week of economic releases. Key global elections in a few key countries will likely make for another volatile week in the market. The week will start with the durable goods report on Monday, the consumer confidence numbers will be out on Tuesday, pending home sales will come out during Wednesday’s session, the final GDP print and the Chicago PMI are scheduled for Thursday, and the ISM manufacturing PMI and the core PCE Price Index will come out on Friday. U.S. politics could also take center stage as the fate of President Biden’s infrastructure packages and the debt ceiling debate could have a major impact on many financial assets.