Stocks Trade Sideways Before Holiday-Shortened Week
Global stock markets traded mostly sideways this week as economic data was mixed and elevated stock valuations have led investors to begin scaling out of positions before Monday’s trading holiday.
On the positive side, consumer confidence numbers in the US rose along with the Empire State Manufacturing survey (which tracks industrial production in the New York region). On the negative side, national Industrial Production figures surprised markets to the downside (showing contraction from the previous month), and sales data from Wal-Mart (the world’s largest retailer) came in well below analyst expectations.
For the most part, this week’s macro-economic data was mostly second tier. This week’s most significant report, the US Retail Sales figures, came in exactly in-line with analyst estimates at an increase of 0.1%. Data outcomes like this suggest that there is essentially no change from the previous month and so this result was not enough to generate volatility in stocks or currencies. Some of the sideways trading trend was altered after earnings data from Wal-Mart showed that increases in the payrolls tax are starting to cut into already-weak consumer spending numbers.
Budget Talks to Guide Next Market Direction
Now that markets are seen in a holding pattern, spread betting traders will look ahead to the next budget deadline in the US, as both side of the government decide on sequestration. The major issue at stake is whether Republicans and Democrats can manage to postpone the substantial budget cuts (valued at $1 trillion) that are scheduled to begin on March 1st. Given this schedule (and the holiday-thinned trading we will see next week), markets are unlikely to find any reasons to rally until the budget decision event risk is out of the way. The S&P 500 closed essentially flat for the week (after nearly a 2-month run of gains), and the latest close at 1520 equates to a 6.6% rise so far this year.
Most of this rally has been based on the progress made in the aforementioned budget talks and in central bank stimulus programs. The benchmark index is now trading at 15 times company earnings, which is still well below the 60-year average of 16.4. Long term, this is a bullish scenario for stock markets but shorter term, markets are still vulnerable to some downside correction and investors might be unlikely to enter into new buy positions until there is some more clarity on the US budget talks. US markets will be closed on Monday so it might not be until the middle of the week that we see stock trading return to full volume.
Technical levels in the S&P 500 are somewhat aimless, as there is no real resistance until the all-time highs seen in 2007. The NASDAQ, however, could be forming a potential head and shoulders pattern, with the right shoulder topping out at current levels (2780). As long as prices hold below this level, medium term sell positions can be taken here, targeting a drop to at least 2580.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.