More tough sledding ahead
After a rally that pushed the Dow within 110 points of its all-time high, stocks have been slumping. Next week, it could get rougher.
By Alexandra Twin, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- Has Goldilocks left the building?

A surprisingly strong end-of-summer rally set the Dow industrials within 110 points of an all-time high and investors were feeling good. The rally was nurtured by falling oil prices, bets that the Federal Reserve Board won't lift interest rates again anytime soon and a sense that growth is neither too hot, nor too cold, but just right, a.k.a. a 'goldilocks economy.'

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But that good cheer disappeared abruptly Thursday following the release of the September Philadelphia Fed index, which plunged into negative territory for the first time in three years.

Following the report, stocks tanked, bond prices jumped and the dollar tumbled. And the sentiment in the market seemed to switch abruptly.

Analysts say it's not likely to switch back in the week ahead.

"We were due for a setback after the rally, so everyone jumped on this Philly Fed report on worries that the economy is slowing and corporate earnings will slow too," said Donald Selkin, director of research at Joseph Stevens.

While the Philly Fed, a look at manufacturing in the mid-Atlantic, is generally noted by financial markets, its a regional read and therefore doesn't usually have the power to start or stop rallies.

But it won influence by being the first report in some time to remind investors that the economy is still at risk of heading into a recession, rather than just a slowdown. It also reminded investors that the economy's problems are not just focused around the much-discussed cooling in the housing market.

Whether the manufacturing sector is really slowing as much as the report suggested remains to be seen. Last week, the report's New York counterpart - the Empire State index - showed better-than-expected growth. Meanwhile, the national read on manufacturing from the Institute for Supply Management isn't due until early October.

But the report raised the red flag for investors, and with the major gauges flirting with multi-year highs of late, stocks may be ripe for some profit taking.

Trouble in the near term

The market is probably due for some more declines in the short term, but shouldn't pull back too dramatically, said Paul Rabbit, president at Rabbit Capital Management. He noted that the tail end of a quarter can be challenging as companies tend to warn investors if quarterly earnings are on track to disappoint.

In addition the last week of September is often rough, the Stock Trader's Almanac notes, in that its the end of the fiscal year for a lot of mutual funds, and so managers tend to sell their losers for tax purposes.

But beyond the next week or so, "I think we'll see an upward bias," Rabbit said.

Oil prices have dropped around 23 percent from the record highs in August and that works like a tax cut for consumers, Rabbit said.

In addition, the slowing economy paired with mild inflation means that the Fed is likely to hold interest rates steady for now - as it did last week. Traders are even speculating that the central bank will start to cut rates early next year, and speculation about when could lift stocks.

But for the short term, look out, as investors back track after a surprisingly strong run.

The major gauges have climbed for three of the last five weeks. Between August 11 and Wednesday, the Dow rallied 4.7 percent. It peaked Wednesday within 110 points of its all-time high of 11,722.98, hit on Jan. 14, 2000.

The broader S&P 500 index jumped 4.6 percent between Aug. 11 and Sept. 20, ending Wednesday's session just below its 2006 high hit in May. Had the index taken out that high, it would have stood at its best level in 5-1/2 years.

The Nasdaq gained 9.5 percent in the five-week period.

Housing and inflation in focus

Next week brings a slew of relevant economic reports, including reads on consumer confidence, new and existing home sales, personal income and spending and the report's main inflation gauge - the PCE deflator. (See calendar for details).

"Next week's home sales number will look ugly," said Stephen Stanley, chief economist at RBS Greenwich Capital. "But the most important number of the week is the core PCE deflator on Friday, because that's the number the Federal Reserve has chosen to focus on."

Depending on what the reports say about the economy, stocks may fizzle or they may just stick to a range, the analysts said.

There are no market-moving earnings due next week, but in addition to the economic news, investors are likely to keep Hewlett-Packard in focus, amid its growing boardroom leak investigation scandal.

On Friday, HP said that Chairman Patricia Dunn resigned effective immediately amid her role in the scandal. Dunn, who initially said she would step down in January, will be replaced by chief executive Mark Hurd. Dunn is also leaving HP's board.


More on the markets

Fed holds rates steady

Worried about the economy Top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.