State of the Stock Market Analysis for the Week Ending August 9th, 2015 (Dow Continues Worst Streak in Four Years 08-09-2015)Stock picking service

The stock market fell on Friday, as a solid jobs report left open the possibility of a Federal Reserve rate hike next month. The Dow fell 46, or 0.3%, to 17,373. The Dow declined for the seventh straight session; its worst losing streak in four years. The Nasdaq was down 13, or 0.3%, to 5,044, while the S&P 500 dropped 6, or 0.3%, to 2,078. Declining issues outnumbered advancers by an approximately 3-to-2 ratio on the NYSE, where volume remained heavy.

Traders think that, although Friday’s jobs number was below expectations, it was not enough to convince the Fed that it should not raise interest rates in September. As one trader explained, “Although the 215,000 jobs added in July were below the 220,000 jobs economists had expected, it probably was not bad enough to dissuade the Fed from raising rates next month. Remember that the Fed has been looking for ‘further improvement’ in the labor market, and Friday’s figure was likely close enough. And that is the type of view that led many investors to sell on Friday.”

It was yet another one of those “good news, bad news” weeks for the stock market. The good news was that China and Greece calmed down a bit this week, but the bad news was that oil prices and U.S. Treasury yields continued to fall sharply. The 10-year U.S. Treasury yield is down to 2.17%, and that suggests a “flight to quality” of global capital that is simply nervous right now about the state of the global economy. The fall in oil prices could be supply or demand driven, and there are solid arguments on both sides of that equation, but the recent slide has global investors feeling a bit nervous.

The “good news, bad news” story in the U.S. was the government jobs report that showed 215,000 new jobs for July, which was down from June’s 231,000, as well as slightly below the 220,000 that economists had expected. It was good news to see job growth holding its own, but the “bad news” for the stock market is that July’s number was high enough to keep a September rate hike by the Federal Reserve a distinct possibility. For a struggling summer stock market that is pretty much flat for the year, the thought of a September rate hike is bad news.

Friday’s stock market did rally back a bit toward the close, but the major indices were still lower for the week, as we saw the Dow down 2.2%, the Nasdaq down 2.3% and the S&P 500 1.6% lower for the week. There was some concern about seeing the Dow down for seven-straight days, which is a rare occurrence that we have not seen since 2011. At 17,373, the Dow is now below its 50-day moving average of 17,795 and its 200-day moving average of 17,673, and two of the main drivers have been Apple (AAPL) and Disney (DIS), as well as weakness in the oil sector.

So what does all of this mean for the stock market as we head into the “lazy days of summer,” and toward the dreaded September/October time of year? If anything, what we are experiencing right now feels a whole lot more like a typical September/October than a July/August, and that has many investors on edge. Earnings season was relatively solid, but it was not all that great. A few hiccups from the likes of mega-caps like Apple and Disney did not help matters at all, and that has only added to investor nervousness.

The S&P 500 and the Nasdaq are below their respective 50-day moving averages of 2,096 and 5,075, but each is still holding up above their 200-day moving averages of 2,061 and 4,880. One new development, however, is the renewed weakness in the small-cap Russell 2000. The Russell 2000 closed on Friday at 1,206, which puts the Russell 2000 below both its 50-day moving average of 1,245 and its 200-day moving average of 1,221. Small caps have often been referred to as the “canary in the coal mine” for the broader market, so we will keep a close watch on the Russell 2000 in the days ahead.

Looking forward to September, there is no getting past the “Elephant in the Room,” which we all know is the Federal Reserve and what it has planned for interest rates. There is a growing chorus of critics, including Bill Gross, who are making the case that the zero interest rate policy (ZIRP) could actually be hurting the broader economy. We all know that traditional savers at banks have been hit extremely hard over the past few years, but the thought that zero interest rates have created “zombie corporations” (according to Gross) that are alive only because of low rates is an interesting concept.

The thought is that the six-plus years of abnormally low interest rates may be creating a massive “misallocation” of capital, and that could be why the economy is sputtering. Some economists use the term “mal-investment” to describe this sort of imbalance, so we will just have to see how this financial drama unfolds. The one certainty, however, is that if or when the Fed finally DOES increase rates, global financial markets will likely not be all that thrilled. We will deal with that when it occurs.

The recent stock market weakness might actually already be pricing that sort of scenario in, so perhaps the September/October period might turn out better than many market sages think. That said, the Gorilla wishes each and all a relaxing August weekend. It was a tough week for investors, so a little calm and quiet might be just what the bullish camp needs right now to regroup. Again, have a great weekend, and we will be back in action on Monday!

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