Sector Detector: Random Observations As Consolidation In Stocks Continues

The stock market’s technical consolidation continues, and in fact anyone who missed last week’s entry point for the widely-anticipated year-end rally is getting another shot at it. The S&P 500 and Dow Jones Industrials both lost round-number support again this week at 1800 and 16,000, after briefly recovering them from last week’s pullback. However, the NASDAQ is still holding its breakout above 4000 and the Russell 2000 above 1100. Here are some random observations on what is driving market gyrations during this consolidation period.

A bipartisan Congressional committee came to an agreement on the budget, but with House support far from certain. Both the far left and far right are unhappy (the very definition of compromise, by the way), “But we understand in this divided government we’re not going to get everything we want,” said Paul Ryan, who served on the committee. “It makes sure that we don’t lurch from crisis to crisis.”

Facebook (FB) was added to both the S&P 500 and S&P 100 indexes. MasterCard (MA) declared a 10-1 stock split, which is appropriate for a $760 stock but unusual in an era in which hardly anybody splits anymore. MA was up +3.5% on a bad market day.

The Bureau of Labor Statistics’ JOLTS (Job Openings and Labor Turnover Survey) this week showed a big increase in job openings and record low layoffs. Hiring and quitting are both up. This essentially supports last Friday’s lower unemployment rate of 7.0% and higher labor participation rate of 63%. On the other hand, the Redbook weekly retail sales report fell from +4.9% to +2.6% in year-over-year growth. The FOMC’s next policy meeting is next week, and it’s encouraging to see that the market hasn’t sold off upon any whiff of positive jobs news. Tapering is always on the table for discussion, but I still think it’s quite a ways off.

Given this year’s big outperformance in US stocks versus other regions and asset classes, we should not overlook for 2014 the possibility of mean reversion and/or the positive impact of accelerating global recovery on those other areas, like commodities, emerging markets, Europe and Japan. Within the US markets, however, sector correlations remain high (a rising or falling tide….).

Some market technicians, like BA/ML Head of Global Technical Strategy MacNeil Curry, think US stocks could see as much as a 20% correction next year. But I’m not at all convinced — at least not in the first half of the year. In fact, I think that some of the massive sideline cash will start finding its way into equities as the New Year begins and a budget deal is consummated, oil prices remain low, global uncertainties continue to subside, and the Fed demonstrates its ongoing support for the economy and risk assets.

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