Why Stocks Bowed on Monday

Disappointing non-manufacturing PMI reports from both the ISM and Markit Economics sent stocks lower on Monday.

Stocks retreated moderately on Monday after both Markit Economics and the Institute for Supply Management reported lower non-manufacturing PMI readings for December. The ISM’s December 2013 Non-Manufacturing Report on Business indicated that the NMI (Non-Manufacturing Index) dropped to 53 percent in December from November’s 53.9 percent. Economists were expecting an increase to 54.8 percent.

The Markit U.S. Services PMI declined to 55.7 from November’s 55.9 and the “flash” reading of 56.0. The Markit U.S. Composite PMI dipped to 56.1 from November’s 56.2. For all PMI reports, a reading above 50 indicates expansion and a reading below 50 indicates contraction.

The Dow Jones Industrial Average (NYSEARCA:DIA) lost 44 points to finish Monday’s trading session at 16,425 for a 0.27 percent decline. The S&P 500 (NYSEARCA:SPY) fell 0.25 percent to finish at 1,826. The Nasdaq 100 (NASDAQ:QQQ) declined 0.33 percent to finish at 3,526. The Russell 2000 (NYSEARCA:IWM) dropped 0.77 percent to end the day at 1,147.

In other major markets, oil (NYSEARCA:USO) fell 0.53 percent to close at $35.37. On London’s ICE Futures Europe Exchange, February futures for Brent crude oil advanced 21 cents (0.20 percent) to $107.10/bbl. (NYSEARCA:BNO). February gold futures declined $1.70 (0.14 percent) to $1,236.90 per ounce (NYSEARCA:GLD).Transports drove off a cliff on Monday, as the Dow Jones Transportation Average (NYSEARCA:IYT) fell 1.30 percent.

In Japan, the stock market finally re-opened for the first time since December 30. During that period, the yen strengthened from 105.41 per dollar to 104.26 per dollar. Once the stock market re-opened on Monday, the yen’s exchange rate took its toll on stock prices because a stronger yen causes Japanese exports to be less competitively priced in foreign markets (NYSEARCA:FXY). The Nikkei 225 Stock Average sank 2.35 percent to 15,908 (NYSEARCA:EWJ).

Stocks sank in China after the HSBC China Services Business Activity Index fell to 50.9 in December from November’s 52.5. The HSBC Composite Output Index declined to 51.2 in December from November’s 52.3. The Shanghai Composite Index dropped 1.80 percent to 2,045 (NYSEARCA:FXI). Hong Kong’s Hang Seng Index declined 0.58 percent to 22,684 (NYSEARCA:EWH).

Stocks declined modestly in Europe, despite the fact that the Markit Eurozone Composite PMI rose to 52.1 from November’s 51.7. The fact that the final reading was consistent with the “flash” reading surely spoiled the excitement.

On the other hand, the Markit Eurozone Services Business Activity Indexdipped to 51.0 from November’s 51.2. The final reading of the Services Index was also consistent with the flash reading. The Euro STOXX 50 Index declined 0.17 percent to 3,069 on Monday — remaining above its 50-day moving average of 3,036. Its Relative Strength Index is 55.31 (NYSEARCA:FEZ).

Technical indicators revealed that the S&P 500 remained above its 50-day moving average of 1,793 after declining 0.25 percent to finish Monday’s session at 1,826. Its Relative Strength Index declined from 60.53 to 57.81. The MACD is dropping toward the signal line, which would suggest that the S&P could continue its decline during the immediate future.

On Monday, three sectors advanced and six sectors declined. The consumer discretionary sector took the hardest hit, falling 0.62 percent.

Consumer Discretionary (NYSEARCA:XLY): -0.62%
Technology: (NYSEARCA:XLK): -0.17%
Industrials (NYSEARCA:XLI): -0.58%
Materials: (NYSEARCA:XLB): -0.55%
Energy (NYSEARCA:XLE): +0.14%
Financials: (NYSEARCA:XLF): +0.09%
Utilities (NYSEARCA:XLU): +0.16%
Health Care: (NYSEARCA:XLV): -0.42%
Consumer Staples (NYSEARCA:XLP): -0.38%

Bottom line: Disappointing service sector PMI reports sent the major stock indices moderately into the red on Monday.

John Nyaradi is the author of The ETF Investing Premium Newsletter.

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