Dow and S&P down two weeks in a row, Fed meeting on tap

By Danny Riley

The Dow Jones Industrials [^DJI:DJI] and the S&P 500 [^GSPC:SNP] saw their largest weekly drop since August and their first back-to-back weekly losses in over two months.

Over $11 billion in stock has been sold on the close over the last 13 trading days. That selling has weighed on the markets, pushing the S&P 500 index as low as 41 handles off its record high.

The 10-year note fell, taking the benchmark’s yield down two basis points to 2.86%.

Out of bonds and stocks

Profit-taking has been showing up in stocks since Monday, Nov. 25, the last trading week of the month. It has continued over the closes of 12 of the last 13 trading days with net sell imbalances of nearly $11 billion at pre-close.

While there have been several “taper” false starts, the constant selling over the last two-plus weeks leading up to the Federal Reserve’s final meeting of the year has cast a dark cloud over the markets. Additionally, money has been pouring out of bond funds, which are on track to have another $20 billion outflow for December.

Investors have pulled over $172 billion in the last eight months and many feel there is a lot more to go. Considering that $1.3 trillion poured into bond funds over the last five years, it looks like the current trend away from bond funds will continue. This could be a good sign for stocks in 2014.

DAX & S&P

One key thing to look at today is the DAX, which made a low on Thursday at 8980, followed by a 10-point higher daily low on Friday at 8990, and closed at 9029, 39 points off its low. If the DAX takes out its low today the index could potentially go down all week.

Busy week ahead

This week’s economic calendar includes 14 T-Note and T-bond announcements and auctions, 26 economic reports, the two-day FOMC meeting, FOMC announcements, forecast and press conference.

Today’s economic calendar includes the Empire State manufacturing survey, productivity and costs, PMI manufacturing, Treasury international capital, industrial production and 3- and 6 month T-bill auction.

Our view

The Asian markets closed mostly lower and Europe is trading mostly higher. The December quadruple witching combined with this week’s two-day Fed meeting should make this a very volatile week.

Like it or not, the markets are breaking down, but does this selloff end like all the others or is the Fed about to drop a bomb on the markets? We have all known for a long time that the Fed’s $85 billion a month in bond purchases has supercharged the stock market and we also know it can’t go on forever.

Mondays are usually the lowest-volume day of the week. In order to know exactly what the volumes are, start with the total reported volume, subtract Globex volume and the ESZ/ ESH spread, and take off 60% of that amount to account for program and computer-generated trades. What’s left is the total customer trading volume.

It’s critical that the DAX and the S&P E-mini [ESH14:CME] hold their current lows. If the S&P does break down, it could target the 1735-1740 area, and a hard break from there could pull the S&P down to 1680 and its 200-day moving average at 1662.

Do we think that is actually in store this week? No, we don’t, but it’s hard to overlook all the gloom and doom taper talk. On the upside, the ESH has to get back above the 1785 -1788 level to start taking out some buy stops and above 1796 to really start to regain some of its momentum.

Personally, we don’t want to be part of calling for a crash, but a lot of people out there are calling for one. Our view is that while the markets look weak and could go down, we think they already have.

Does that mean they can’t go lower? No, but it doesn’t necessarily mean they can’t go back up either. What we do know is the S&P tries to bounce but the late-day selling always pressures it back down. Our view is that the S&P has been down 4 in a row and everyone is bearish … you take it from there.