Skidding Stocks Test Rally Resilience

Crosscurrents in the market continue to blow negative economic data into the mix. Today's rash of non-encouraging news came from two sources: the Commerce Department, which reported that durable goods orders fell 2.4%, when analysts were looking for a 0.4% gain; and the National Association of Realtors, in their monthly report on new home sales, which showed a gain, from a seasonally-adjusted 446K to 449K, smaller than expectations.

These minor gyrations in key economic data have been in the mix for two days and the markets have responded with something along the lines of a 2-3% decline in the value of stocks. Of course, not all stocks - nor indices - are created equal, and Friday's close demonstrated that the trade on the day was into defensive stocks and widely held issues, as the Dow outperformed the other majors on a relative basis. The losses on the Dow, as compared to yesterday, were almost exactly the same, but the NYSE Composite fared much better. On Thursday, the Comp was down 1.47%, as compared to -0.57% today.

There was a smattering of good news, as the Michigan Consumer Sentiment Survey moved higher in September, to 73.5, from 70.2 in July. People had a right to feel better this month. Until just this week, the weather was nice (except in Georgia) and the stock market was up. Kids being back in school must have added at least half a point to the adult happiness index.

Dow 9,665.19, -42.25 (0.44%)
NASDAQ 2,090.92, -16.69 (0.79%)
S&P 500 1,044.38, -6.40 (0.61%)
NYSE Composite 6,823.51, -38.80 (0.57%)

Our simple indicators are suggesting that whatever decline is currently built into the markets, it's not going to be a large one, or, at worst, it's not going to damage all stocks and all sectors. After the big hits on Wednesday and Thursday, today's drop was moderate and much less broadly-based. Advancers were once more beaten back by decliners, 3640-2727, which was a vast improvement from Thursday's 3-1 ratio. New highs topped new lows, 213-42, roughly in line with yesterday's numbers. Volume was off significantly from the prior two days, suggesting that whatever downside risk is prevailing, it isn't much. There was no panic selling at all, though stocks did finish much closer to their lows than their highs, so until that trend reverses course, there's likely to be choppiness in the near term.

NYSE Volume 5,279,540,000
NASDAQ Volume 2,336,395,000

Commodities were muted once more, with oil up a mere 13 cents, to $66.02, close to yesterday's two-month low. Gold fell $7.30, to $991.60, while silver slipped 24 cents, to $16.06.

In total, the week was not that bad, considering the recent run in stocks, which happen to be the only place to make money these days. The 10-year Treasury was a strong performer, with yields down from 4.48% earlier in the week to 4.33 on Friday.

With September coming to an end next week, the outlook will be focused on employment - or the lack thereof - as September non-farms payroll data is likely to have a huge impact. The market will be looking for job losses of under 200,000, after the August numbers came in at -216,000. That may be somewhat of a reach and could harm stocks short term.

One caveat to all of this is that expectations for a smooth recovery from the very sharp recession may be a bit too optimistic. While the data on existing home sales and durable goods this week took a step backwards, understanding that nothing moves in exactly a straight line could prove to be a valuable piece to the economic puzzle. Like the stock market, the economy runs into bumps and grinds as well. It's a huge country, and the data may not be perfectly reliable as well, so it's a good idea to keep a broad perspective and an open mind.

Improvement will happen, but not all at once and certainly not in measured doses.