If September were to end today, September 2010 would go down as the seventh best September for the S&P 500 since 1928. A mere three days into the month, the S&P 500 has risen 5.26%. On only six other occasions – 1939 (start of World War II) +14.4%; 1950 (price/earnings ratio of 6.9x) +5.6%; 1954 +8.3%; 1996 +5.4%; 1997 (near resolution of the Asian Contagion) +5.32%; and 1998 (bailout of Long-Term Capital Management) +6.2% – has the market done better in September.
Near-term trading is all about newsflow and expectations. The past week offers evidence of this maxim up in spades.
The market soared this week not because the economic news was good. It was not. It was mediocre at best. The market soared because it was not as bad as thought. Jamming shorts into an illiquid market pushed the indices into the upper end of their four-month trading range.
The market was exceedingly pessimistic going into the month, with all sorts of chatter about a double dip. Four pieces of data mattered, three of which caused the market to take off like a scalded cat and one that was ignored.
On Wednesday, the August ISM Manufacturing index handily beat expectations. Perma-bear David Rosenberg detailed concerns about the ISM print, but the market would have none of it as the S&P 500 rose 3% and the Russell 2000 4% on Wednesday.
On Thursday, pending home sales unexpectedly rose 5.2% in July whereas economists were expecting a decline. Sales declined 2.8% in June and a whopping 29.9% in May after the expiration of the homebuyers’ tax credit. Whether or not the increase in home sales is a dead cat bounce remains to be seen, but for the moment, the market interpreted the data as the consumer having a pulse.
Friday was the jobs report. Nonfarm payrolls in August declined 54,000, half of expectations. Private payrolls rose 67,000, beating expectations of +40,000. Perhaps more importantly, there were substantial upward revisions, with July revised from -131,000 to -54,000, and June from -221,000 to -175,000.
Interestingly, manufacturing jobs declined by 27,000, even though the jobs component of the ISM survey increased. Prior to the release, David Rosenberg questioned the jobs component of the ISM, noting inconsistencies in the data.
An increase of 67,000 was the eighth consecutive month of positive private job creation. However, job creation is still weak. The prior seven months were; July +107k, June +61k, May +51k, April +241k, March +158k, February +62k, and January +16k. Private job creation has been positive but August was below the year's average of +99k. Over the past four months, private sector job growth has average +72k. Private job growth has decelerated.
This is consistent with the claims data. Initial jobless claims last week were 475k, above the 2010 average of 465k. The average of initial claims for August was 486k, the highest monthly average this year.
According to the ISM non-manufacturing index, employment may even be contracting. The broad index came in lower than expected at 51.5, signaling continued but slowing expansion. (A reading above 50 implies expansion. A reading below 50 implies contraction.) However, it was the lowest reading since January. Given that the market went ga-ga over the ISM manufacturing index and ignored the services index, it should be noted that services are a much bigger part of the economy than manufacturing.
What was more interesting were the components of the index. Business activity, new orders and order backlog all declined, while employment and new export orders were in outright contraction. The reading for employment was 48.2, indicating that employment is falling in the services sector of the economy. Also, inventory sentiment rose, indicating that managers think their inventories are too high.
Net net, the news releases were better than expected but weak in the absolute. However, in a market where expectations were clearly negative, incrementally positive news can jam the market higher, especially when everyone is at the beach (except of course the machines that run the market, which never go to the beach).
The question now is whether or not the market can break through the fast approaching resistance levels. My guess is that Tuesday will be up day, as Mutual Fund Monday is deferred because of the long weekend, pushing the market towards the upper end of the trading range. I think the real test will come later in the week and into the following week as volume comes back into the market. If volume does not come back into the market, be concerned, even if the market goes up.
The market is a discounting mechanism. Perhaps the market action of the last three days is signaling that the economy is going to get stronger. But the economy is going to have to show strength soon. The data thus far has been weak, consistent with an anemic economy and a market in a trading range.