Rough Start to Fourth Quarter

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The fourth-quarter of 2019 did not make a good first impression on Tuesday as the major indices each plunged more than 1% due to soft manufacturing data.  

The ISM manufacturing index for September came in at 47.8%, which was the lowest level in over a decade and marked the second straight month of contraction. Needless to say, it also fell below expectations.   

The Dow understandably had the worst performance on Tuesday because of this data, dropping 1.28% (or around 340 points) to 26,573.04. Meanwhile, the S&P slipped 1.23% to 2940.25 and the NASDAQ was off 1.13% (or about 90 points) to 7908.68.

The major indices each started the day solidly in the green before the number was released. They are also coming off of positive results for the usually difficult month of September.  

The report immediately had already skittish investors worried about recession, despite manufacturing making up a much smaller piece of the economy than services.

“This is the first time we have seen back to back contraction reading since the end of 2015 where there were 4 straight months of sub-50 readings,” said Brian Bolan in Stocks Under $10.

“Did a recession come from that weakness? Not at all, in fact, the ISM Manufacturing number ran over the course of the next two years to highs over 60. So take these numbers with a grain of salt.”

The Government Employment Situation report on Friday will now be even more important. Last month was a little below expectations, though the unemployment rate held steady while wages and the participation rate rose.  

Of course, the biggest possible boon to manufacturing and the whole economy would be some sort of resolution on the trade front.

Therefore, the meetings between the U.S. and China next week may end up being the major event of the quarter, followed closely by earnings season and the next Fed meeting.

Despite last year’s anomaly, the fourth quarter is usually a strong time for the market, so let’s wait and see what happens with these events before getting concerned.

Today's Portfolio Highlights: 

Stocks Under $10: After selling a couple names yesterday, Brian Bolan came back with a replacement pick on Tuesday. He added Maxar Technologies (MAXR), a satellite and communications play that is mainly a defense contractor. In its most recent report, the company posted a positive earnings surprise of 380%! Earnings estimates have improved for this year and next, underscoring MAXR’s status as a Zacks Rank #2 (Buy). Even though it is still running a loss, the editor really appreciates that the loss is narrowing. Read the full write-up for a lot more on this new addition.

TAZR Trader: Trade talks between the U.S. and China are scheduled for next week, but you can consider Kevin skeptical. He believes the odds of a deal are remote, so he initiated an aggressive short trade by buying Direxion Semiconductor 3X Bear ETF (SOXS) with a 5% allocation. If you’re more optimistic about next week’s meeting, then you shouldn’t take this trade. The editor is also slowly adding more of genetic diagnostics company Invitate (NVTA). Learn a lot more about these aggressive trades in the complete commentary.

Zacks Short List: This week's adjustment included three swaps. The following positions were short-covered on Tuesday:

• Qualcomm (QCOM, +2.9%)
• Ceridian HCM Holdings (CDAY, +2.2%)
• Cheniere Energy (LNG)

The new buys that filled these spots are:

• Inphi Corp. (IPHI)
• Insulet Corp. (PODD)
• Pacira Pharma (PCRX)   

Learn more about this emotion-free portfolio that takes advantage of falling and volatile markets by reading the Short List Trader Guide.

All the Best,
Jim Giaquinto

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