Market Update - August 19

The major indices had a somewhat mixed showing on below-average at volume at the NYSE. There wasn't a lot of conviction on either side of the tape, which is consistent with late-summer activity and consolidation efforts. Decliners had a less than 3-to-2 lead over advancers at both the NYSE and the Nasdaq.

Mega cap leadership had a disproportionate influence on index gains, leading to the outperformance of the S&P 500 and Nasdaq. The Vanguard Mega Cap Growth ETF (MGK) rose 1.2% and the market-cap weighted S&P 500 logged a 0.6% gain. The Invesco S&P 500 Equal Weight ETF (RSP), meanwhile, closed flat.

There was no economic data of note of Monday.

Stocks had a weak showing today in another lightly traded session. The major indices had been holding steady with somewhat modest losses after the S&P 500 found support near its 50-day moving average (4,447) in the early going. Selling picked up in the last half hour of trading, however, when the S&P 500 breached its 50-day moving average. The major indices ultimately settled near their worst levels of the day and the S&P 500 closed below its 50-day moving average for the first time since March.

Market participants are still contending with the notion that the market is due for a pullback after its hot run, which created valuation concerns. Growth worries, which were piqued by a batch of weaker than expected retail sales, industrial production, and fixed asset investment data for July out of China, and a warning from Fitch Ratings that it might be forced to downgrade the ratings of dozens of additional banks, gave investors an excuse to take more money off the table.

Lagging bank stocks were a notable pocket of weakness. The Fitch Ratings warning came just a week after Moody's cut the ratings of ten small to mid-sized U.S. banks. The SPDR S&P Regional Banking ETF (KRE) fell 3.3% and the SPDR S&P Bank ETF (KBE) fell 3.1%. Also weighing on the group was Minneapolis Fed President Kashkari's view that banks may need to face tougher capital regulatory standards.

The slowdown concerns led to the underperformance of cyclically-oriented sectors and the relative outperformance of growth stocks compared to value stocks. The Russell 3000 Growth Index fell 1.0% while the Russell 3000 Value Index fell 1.4%.

Reviewing Tuesday's economic data:

• Total retail sales increased 0.7% month-over-month in July (Briefing.com consensus 0.4%) following an upwardly revised 0.3% increase (from 0.2%) in June. Excluding autos, retail sales were up 1.0% month-over-month (Briefing.com consensus 0.4%) after increasing an unrevised 0.2% in June.
  • The key takeaway from the report is that discretionary spending on goods remained healthy in July, providing another cue that the tight labor market continues to fend off a hard landing scenario for the U.S. economy.
• The August Empire State Manufacturing Survey dropped to -19.0 (Briefing.com consensus 2.4) from 1.1 in July. A reading below 0.0 for this report is indicative of a contraction in manufacturing activity.
• Import prices increased 0.4% month-over-month in July and export prices rose 0.7%. Nonfuel import prices were flat and export prices, excluding agricultural products, jumped 0.6%. These monthly gains notwithstanding, import and export prices were still down 4.4% and 7.9%, respectively, on a year-over-year basis.
• Business inventories were flat in June (Briefing.com consensus 0.1%) following a prior 0.2% increase.
• The NAHB Housing Market Index fell to 50 in August (Briefing.com consensus 56) from 56 in July.

The stock market closed on a downbeat note, building on Tuesday's losses in another light-volume session at the NYSE. Weakness had been more modest in the early going, though, due to a lack of conviction from either buyers or sellers.

The S&P 500 hit its 50-day moving average (4,449) shortly after the open, but was unable to breach that key technical level, which then invited renewed selling interest. The major indices had been trading in relatively narrow ranges until the 2:00 p.m. ET release of the FOMC Minutes from the July meeting induced some whipsaw action.

There was some knee-jerk selling in response to some hawkish sounding headlines from the minutes. For example, "most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy."

That view wasn't exactly surprising, however, considering remarks made by Fed Chair Powell after the July 25-26 meeting. All together, the minutes didn't contain anything too surprising. Mindful of that, stocks rebounded from the knee-jerk selling, yet that effort stalled out as the 10-yr note yield climbed above 4.25% and eclipsed a closing high yield from last October. The 2-yr note yield settled three basis points higher at 4.97%.

The S&P 500 ultimately closed just above the 4,400 level and at its lows for the session, continuing the consolidation trade that took root at the start of the month.

Festering growth concerns also contributed to the weakness after China reported another decline in home prices.

The U.S., however, saw stronger-than-expected housing starts and industrial production in July. Also, the Atlanta Fed GDPNow model was updated and is estimating 5.8% real GDP growth in the third quarter, up from 5.0% previously. That news created some rate hike angst in the Treasury market.

Reviewing Wednesday's economic data:

• The weekly MBA Mortgage Applications Index fell 0.8% with refinance applications falling 2.0% while purchase applications were flat from last week.
• Total housing starts increased 3.9% month-over-month in July to a seasonally adjusted annual rate of 1.452 million units (Briefing.com consensus 1.446 million) and building permits increased 0.1% month-over-month to a seasonally adjusted annual rate of 1.442 million (Briefing.com consensus 1.460 million).
  • The key takeaway from the report is that the increase in starts and permits, albeit modest, was driven by single-family units, which are badly needed in a supply-constrained existing home market.
• Total industrial production increased 1.0% month-over-month in July (Briefing.com consensus 0.3%) following a downwardly revised 0.8% decline (from -0.5%) in June. The capacity utilization rate jumped to 79.3% (Briefing.com consensus 79.0%) from a downwardly revised 78.6% (from 78.9%) in June. Total industrial production was down 0.2% yr/yr. The capacity utilization rate of 79.3% was 0.4 percentage point below its long-run average.
  • The key takeaway from the report is that most major market groups recorded growth in July, demonstrating that there was a pickup in activity that fits with an economy that continues to operate in a growth mode despite the Fed's rate hikes.
• The weekly EIA crude oil inventories showed a draw of 5.96 million barrels following last week's build of 5.85 million barrels.

The major indices closed on a downbeat note after trading flattish in the early going. Initially, the S&P 500 was holding steady with 4,400 acting as a level of support. By the afternoon, though, a retreat effort had taken root, leading the major indices to close near their lows of the day and below 4,400.

The afternoon selling was orderly and looked consistent with the consolidation mindset that has driven the price action so far this month. Another jump in market rates gave participants an excuse to take more money off the table. The 10-yr note yield rose five basis points today to 4.31%, settling at its highest level since November 2007.

This morning's weekly jobless claims data was indicative of a tight labor market, which also contributed to the move in the 10-yr note. Claims dropped to 239,000 from 250,000 last week.

Dow component Cisco (CSCO) was a winning standout after its earnings report while fellow Dow component Walmart (WMT) logged a decline after its earnings report.

Reviewing Thursday's economic data:

• Weekly Initial Claims 239K (Briefing.com consensus 240K); Prior was revised to 250K from 248K; Weekly Continuing Claims 1.716 mln; Prior 1.684 mln
• The key takeaway from the report is that initial jobless claims -- a leading indicator -- are pacing at levels that are indicative of a tight labor market, which is indicative of an economy that isn't pacing for a hard landing.
• August Philadelphia Fed Index 12.0 (Briefing.com consensus -9.0); Prior -13.5
• July Leading Indicators -0.4% (Briefing.com consensus -0.4%); Prior -0.7%

The stock market had a mixed showing on Friday. Early selling sent the S&P 500 to its lowest level in nearly eight weeks while the Nasdaq slid to a ten-week low. The major indices started to nudge higher, though, around mid-morning on no news. There was a sharp, brief move higher in the last 10 minutes of trading that drove the Nasdaq into positive territory for the only time this session.

Ultimately, the S&P 500 closed flat, the Nasdaq fell 0.2%, and the Dow Jones Industrial Average rose 0.1%. The Russell 2000 had a slight performance edge, gaining 0.5% today.

Initial weakness was driven by losses in mega-cap stocks, worries about China after property developer Evergrande filed for Chapter 15 bankruptcy protection in the U.S., and carryover downside momentum after the persistent selling in August.

There was no U.S. economic data of note on Friday.