Several Factors Contribute to SP500 Falling Below its One Month Average and Nov 1 Low

On Friday Nov 12, China announced it would raise rates to curb inflationary pressures. That announcement took the SP500 back to its one month average. On Monday, US Retail Sales gave equities a lift and more than offset the NY Empire mfg survey which showed that mfg region contracting in November. However, the early morning rally fell apart later that day. Overnight, South Korea announced that it was raising rates to curb inflation. Asian central banks raising rates will slow economic activity in the Asian region. This could hurt revenues and profit growth amongst multinationals. On Tuesday morning, it was reported that Producer Prices for October rose 0.4% while Industrial Production remained flat. Warmer weather in October was a significant contributor to IP flat-lining as utility demand fell -3.5%. Additional pressure is coming from Irish banks funding woes, not unlike Greece in the first half of 2010. They continue to have to draw on the ECB to meet its capital requirements.The ECB will lend whatever Irish banks needs right now, and the IMF is prepared to lend whatever Ireland needs. However, this appears to be a kick the can game of extend and pretend. Sources indicate Irelands funding needs may get a bit tougher after the first half of 2013. The November contraction in the NY Empire survey indicated that at least on region was particularly worrisome. New orders fell -24.4 points and shipments fell to -6.1. Prices received fell -2.6. As a composite, no matter how you spin it, US economic activity in the first half of Q4 is slowing. The most disconcerting economic report this week comes from the NY Empire survey falling below 0. This may well be echoed in the Nov Philly Fed report due out on Thursday Nov 18. Philly fed had been in negative territory in both August and September and then only increased to 1.0 in October. The Philly Fed mfg survey has been clearly bearish news for the stock mkt to absorb. We should anticipate that the Philly Fed will be a feedback loop that reinforces the bearish NY Empire survey on Monday. Given that the mfg activity has slipped measurably in November, it is not surprising that the SP500 took out its Nov 1 ISM mfg low at 1173.75 this morning and tagged the Oct 29 low at 1172.25. One should expect a short-covering bounce after taking out the Nov low this morning. However, do not be surprised to see the Oct 21 Philly Fed low at 1167.75 being tested or taken out on Thursday if the Philly Fed comes in worse than last month's 1.0. In fact, a test of the Oct 19 low at 1155.75 and the Q3 high at 1154 may be tested. The pricing models below correlate the decline of the Nov 5-9 double top with the decline off the Aug 5-10 double top into the August Philly Fed week. The pricing models are pointing to a test of 1160-ish later this week. The following week will be Thanksgiving week, which has a seasonal tendency to be bullish into the first week of Dec. Thanksgiving week will feature Existing home sales on Tuesday Nov 23 and the Nov FOMC minutes on Tues Nov 23.