Stocks mixed Monday, with renewed weakness in smaller stocks

Profit taking in some of 2014’s high flyers sent the NASDAQ composite down 1.1% to open the week, while big blue-chip stocks generally ended Monday in positive territory. Biotech stocks fell (-1.5%), as did internet stocks (-2.2%) and some of the stocks with biggest gains for 2014: Tesla, -9.1%; Netflix, -3.9%; Facebook, -3.7%.

Technology stocks fell 0.6% in the S&P 500, 1.2% in the S&P 400 MidCaps, and 1.6% in the S&P 600 SmallCaps. For the S&P 500 and the S&P 400, technology was the weakest sector in the larger composite; in the case of the S&P 600, today’s weakest sector was the hyper-volatile telecoms, which lost 4.4% as a group Monday.

As the above numbers suggest, small stocks were under particular pressure Monday, as the S&P 600 SmallCaps index fell 1.0% to its lowest level in a month. Where the number of S&P 500 stocks declining today led the number of advancers by roughly a 3 to 2 margin, market breadth in the small-cap arena was a lot worse, with nearly 500 stocks dropping against 100 with gains. The Russell 2000 had similar negative readings on Monday: -1.2% index change for the day; -1.5% YTD change; more than 5 declining stocks for every one that advanced.

In contrast, big-cap market indexes managed to hold their ground near zero change on Monday, if off their best levels of the day. The Dow Jones Industrials had a 44-point or 0.3% gain on the day; the S&P 500 was down just 0.1%. After Monday’s action, the Dow is just 0.6% below its all-time high, the S&P 500 just 1.2% lower, and NASDAQ down 1.7%. Small-cap indexes are around 5% off their peak levels.

The question in analyst minds, if not on their lips: does price weakness in small-cap and technology stocks serve as a precursor for a broader market decline (as was the case in 1998-2000). The 35 months since the S&P 500 last suffered a correction of at least 10% is an unusually long correction-less period, and the likelihood that the Fed may lean more decisively in the direction of tightening at this week’s FOMC policy meeting could be a catalyst for some mean reversion in stock prices after the remarkable run enjoyed since March 2009.

In the Treasury bond market Monday, short-term notes had modest price gains, which grew to a peak of six to seven 32nds at around the 10-year note and then tailed off to no change at 30 years. Yields in Europe’s bond markets also showed relatively little change today. FX markets were comparatively calm Monday as well, as were commodities futures.

Along with corporate profits, industrial production has been one of the more impressive data series of the current economic cycle. Some of that luster was lost today with the Fed’s report that industrial output fell 0.1% last month, well off the Street’s expectation of a 0.3% increase. In addition, July’s growth estimates were trimmed in today’s revision. Volatility in auto production, which jumped in July only to fall sharply in August, suggests that faulty seasonal adjustments related to model year changeovers may account for much of August’s production shortfall. On a smoothed basis, U.S. output is running a healthy 4.4% ahead of 2013 levels.

What’s more, if manufacturing in the New York area is any indication, industrial production is rebounding in September. The September NY Fed survey on manufacturing in the New York Federal Reserve district reached its best level in nearly five years in September. The so-called Empire State manufacturing index hit 27.5 in September, nearly double the August reading of 14.7 and much above the Street’s average estimate of 16. Today’s reports are not sufficiently negative or positive to change economic forecasts much one way or the other. And in the end, it is probably Wednesday’s post-FOMC statement, Janet Yellen’s press conference, and the updated “dot-plot” forecasts of the federal funds rate by FOMC members that will have investors’ attention this week.

Reports/dates/facts/links to watch for over the next week:

  1. September 16: German ZEW survey for September; U.S. same store sales for the latest week; U.S. PPI-FD for August.
  2. September 17: U.S. CPI for August; FOMC economic and rate forecasts; Yellen post-FOMC-meeting press conference.
  3. September 18: Scotland’s independence referendum; U.S. housing starts (August); Philly Fed business outlook survey (September).
  4. September 19: U.S. leading economic indicators (August); Atlanta Fed’s business inflation expectations (September).

Copyright © 2014 by Wright Investors’ Service, Inc. The views expressed in this blog reflect those of Wright Investors’ Service, Inc. and are subject to change. Statements and opinions therein are based on sources of information believed to be accurate and reliable, but Wright Investors’ Service, Inc. makes no representations or guarantees as to the accuracy or completeness thereof. These views should not be relied upon as investment advice.

About wrightnetblogger

Senior Vice President – Investment Research/Economist
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