U.S. stocks gained ground yesterday but it was a wild ride as traders faded the open (the major indices began the day higher – Dow Industrials up 255 pts out of the gate), sending the broad market down 1% with less than an hour in the session.  But a re-rally in the final minutes helped most stocks close meaningfully in positive territory.

Only the insane would try to explain the market’s behavior yesterday, which is why I’ll try.

What is safe to say is that a number of things weighed on traders’ sentiment, which can explain the reason traders faded the open.  The latest bailout plan from Europe is seen as just another insufficient backstop (as if anything short of default for Greece and Portugal would work) and the day’s economic data failed to impress.  In addition, while Europe’s troubles have been the focus, Asian growth continues to slow. You may remember the erosion within China’s manufacturing reports we’ve talked about over the past couple of months.  Further, the major Asian stock indices suggest weakness and the 30% plunge in the price of copper is also a clear indication of the deterioration.

Explaining the market’s spike off the session lows in the final minutes of trading is a bit more difficult.  I’ll just take a stab at it and say it was algo trading, no doubt computer-generating trading is dominating activity right here.  Many of these algorithms are based on the activity within the Dollar Index – that index rises and it signals risk off, it falls and signals risk on.  Maybe some algos were triggered to buy as the Dollar Index fell in the final minutes of the session.

Consumer discretionary and tech shares led the losses.  The former was driven by the latest Bloomberg Consumer Comfort reading, which fell to the second-lowest level in the measure’s 26-year history, and the latter by weak results from chipmaker AMD.  Financials, utilities and industrials led the market higher.

Market Activity for September 29, 2011

Sector Activity for September 29, 2011

Jobless Claims

The Labor Department reported that initial jobless claims slid 37,000 last week to 391,000 from the 428,000 in the previous week – a number that was once again revised higher.

The four-week average fell 5,250 to 417,000.

Continuing claims moved in the other direction, however, as standard claims (those that cover the first 26 weeks of joblessness) fell 20,000, while emergency claims (that extend out to 99 weeks) rose 75,500.  Total continuing claims, those taking jobless benefits for at least two weeks, stand at 7.31 million.

So this latest result on initial claims is the lowest reading we’ve seen since the print of 385K for the week of April 1.  As nearly every reading is getting revised higher the following week, one should expect the same to be true for this one, but the print of 391K should be low enough to keep even an upward revision below 400K.  Now, if we could get to the 365K that is needed to suggest the job growth this economy needs is in place, we’d be on to something.   For now, we’ve been diminished to thinking 390K is a good number.

Latest Revision to Q2 GDP

The second revision to last quarter’s GDP was revised higher to show the economy grew 1.3% at a real annual rate, up from the 1.1% that was previously estimated – the revision was expected to come in at 1.2%.

The personal consumption (the largest aspect of GDP) and trade components were the main drivers of the higher reading.  Personal consumption remained weak at 0.7% growth (but up from 0.4%) as higher spending on services offset worse than previously reported spending on durable goods.  And net exports also helped as the trade figures turned out to be better than previously estimated.

The business investment component, which I think is what many believed would be the main driver of an upward revision, failed to help as higher spending on nonresidential structures was nearly completely offset by lower revised equipment and software spending.

So GDP was a bit better than previously expected, which is nice but hardly anything to get excited about as real economic growth has been reduced to a paltry 1.6% over the past year and down to 0.85% over the past two quarters.  It appears that the current quarter has a chance to come in at maybe 2.0%.  This will leave year-over-year economic growth at a worthless 1.5% rate when double that growth is needed, and for an extended period of time, to ultimately ameliorate our debt problems.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900