MarketView for December 3

Summary

Monday was a difficult start to the month of December as disappointing factory numbers dampened optimism about China's economic growth. As a result, the S&P 500 index broke a three-day winning streak, keeping it shy of its 50-day moving average of about 1,420, a level that the index has been below since October 22, and now is serving as a key resistance point. Nonetheless, while off its highs for the year, the S&P 500 is still up 12.1 percent for 2012.

According to a report by the Institute for Supply Management (ISM), manufacturing activity contracted in November, falling to its lowest level in more than three years. Economic data has been mixed in recent months, fanning worries about the pace of growth at a time when investors are already concerned about the "fiscal cliff" issue in Washington.

Among other factors serving to offset the ISM report were two developments in the euro zone: Spain formally requested the disbursement of more than $50 billion of European funds to recapitalize its crippled banking sector, while Greece said it would spend 10 billion euros ($13 billion) to buy back bonds in a bid to reduce its ballooning debt.

Markets had opened higher as output by China's factories grew in November for the first time in more than a year, data showed. Investors look to strength from China, the world's second-largest economy, to offset weak growth in the United States and Europe.

Still, the fiscal cliff remains investors' primary focus, with political haggling continuing over how to deal with large automatic spending cuts and tax hikes scheduled to kick in next year. The worry is that the combination of reduced spending and higher taxes could tip the economy back into recession.

Materials were the weakest sector on Monday, led lower by Newmont Mining after the company said its CEO resigned. Newmont's stock fell 3 percent to $45.69. DuPont fell 1.7 percent to $42.39.

Treasury Secretary Timothy Geithner pushed Republicans on Sunday to offer specific ideas to cut the deficit. He predicted that they would agree to raise tax rates on the rich to obtain a year-end deal to avoid the fiscal cliff.

Dell gained 4.4 percent to close at $10.06. The stock was one of the largest percentage gainers in both the S&P 500 and Nasdaq 100 after Goldman Sachs upgraded the stock to "buy" from "sell.

Advanced Micro Devices was the S&P's top gainer, rising 7.3 percent to $2.36. Options traders appeared to be betting on further gains ahead. Early options order flow was focused on upside April calls, including a sweep of 3,594 April $3.50 strike calls for 16 cents per contract when the market was 14 cents to 16 cents.

Retail stocks were among the weakest of the day, with J.C. Penney off 3.2 percent to close at $17.36 and Staples down 2.3 percent, closing at $11.43. Consumer discretionary names tend to underperform during periods of economic uncertainty as consumers focus on core purchases.

Volume was light with about 5.58 billion shares changing hands on the three major equity exchanges, a number that was well below last year's daily average of 7.84 billion shares.

Manufacturing Contracts

Manufacturing unexpectedly contracted in November to its lowest level in more than three years, as companies worried about whether lawmakers in Washington could reach a budget deal in time avert a crisis that many fear could lead to a recession. The Institute for Supply Management (ISM) said on Monday that its index of national factory activity fell to 49.5 in November from 51.7 the month before.

The figure was the softest since July 2009 when the economy was struggling in the aftermath of the financial crisis. Furthermore, the November slide may have been aggravated by Sandy, which devastated the east coast in late October, as well as uncertainty over budget negotiations in Washington.

The return to contraction - when the index falls below 50 - surprised many who had hoped that two straight months of growth meant the economy had gotten over the weakness seen during the summer months. At the same time there is the theory that despite one-off events, such as Sandy and the fiscal cliff negotiations, while the sector expanded over the previous two months the trend was anemic growth, akin to stagnation.

Recent data also showed consumer sentiment weakened in November amid growing uncertainty over federal tax and spending programs next year. At the same time, October construction spending was a bright spot as the housing sector recovery appeared to be gaining traction. Spending rose by the most in five months, with stronger spending on homes outpacing tepid gains in business and government projects.

Several automakers on Monday reported strong new-car sales for November as the industry rebounded from a weak October while also benefiting from pent-up demand.

Monday's reports marked the start of a relatively busy week for economic data releases that comes to a head on Friday with the closely watched monthly payrolls report for November.