- NASDAQ leads market to weekly gains, but still no new breakout.
- Economic data in line to better, and while no great endorsement of economic activity, things are not as bad as made out.
- Market advance since March forecast modest economic improvement, but is there more to come?
- Some money comes out of commodities stocks on NYSE, but has yet to move elsewhere.
- New month, some new money, but also the dog days cometh.
A week of gains leave market still seeking a more definitive move.
The shortened week was one of gains, and Friday was no exception, though the gains once again were not felt throughout the market. Spending and income were in line with modest gains (0.2%) though if you adjust for inflation both were big goose eggs. With PCE inflation at 0.1% on the core and 2.1% annually, however, investors found some reason to push stocks higher at the open. When the Chicago PMI and the Michigan sentiment reported better than expected results, the market added to its early gains with all indices in positive territory.
The market survived a midmorning test of the early move, and then went into a slow, steady climb into the afternoon. It was the end of the month, however, and that meant money was going to get moved around. It was. In the last hour the indices dropped sharply in the fist half of the hour, then recovered just about up to session highs. A literal last minute decline shaved 6 points off NASDAQ and 40 points off DJ30, leaving the Dow negative on the day. With the overall narrow range for the session and the end of month shuffle, it is somewhat pointless to play 'pin the tail on the meaning of the session.' Best to look at the entire week to get the flavor.
The week showed gains on all of the indices as they rebounded from the sharper selling in the week before the Memorial Day of honor. Those gains, however, were modest and left the indices, overall, shy of significant moves that reverse that downside move. Of all the indices only SP600 and Russell 2000 broke new closing high ground for the rally off the March lows. That the small caps led to new high ground in the rally is significant given their close ties to a stronger domestic economy (hurray!), but the fact that the majority of the other indices did not really even scare new highs leaves the continuation of the rally somewhat problematical.
Again, there were solid moves in individual stocks, and we bought into quite a few of those in anticipation of the small and mid-caps continuing to lead higher, but as is often the case, we tend to buy in when things are unsettled because emerging leaders tend to tell you to buy them when the outcome appears still problematical. Many pronounced the rally dead two Fridays back after that reversal at the 200 day SMA by the large cap indices. You have to like that pessimistic view from a contrarian standpoint, but it sure would have been nice to see some of the other indices come along with the leading stocks and SP600.
TECHNICAL. Low to high action intraday Friday was again a positive for the session, but it was a volatile day inside an intraday trend higher. The action in the last hour showed how fragile the move was as end of month shuffling easily shoved the indices down then up then back down as some window dressing and positioning for the coming month took place. Hey, that is normal; we participated in that as well as we picked up several positions in solid stocks that broke higher and then held their gains into the close with modest pullbacks that gave us some good entry points.
INTERNALS: The advance/decline line was nothing special with 1.2:1 readings on the indices. Volume advanced, moving to above average levels on both NYSE and NASDAQ. That suggests some accumulation on the session, and given some of the moves in leaders that was the case, but it also is simply a characteristic of some end of month portfolio adjusting and positioning both for window dressing in some monthly reports as well as getting ready for the next month. The new high/new low ratio lagged a bit on this move over the prior 7 weeks, suggesting this last rebound is not as strong as the previous upside legs in this rally. New lows were a bit more prominent on this dip than in the April decline that more or less matched the last decline. A bit of deterioration in the quality of the move based upon this indicator, and frankly, the other indicators paint a similar picture.
CHARTS: As noted, the indices rose on the week but with the exception of the small cap indices and a new closing high on NASDAQ 100, there were no new rally highs. The large cap NYSE were again the laggards, coming nowhere near the prior rally high before the latest significant downside leg in the rally. Note that in the week following the April downside leg (the leg that the last pullback most closely matched in points) the indices bounced right back up to new rally highs. Not nearly the case on the large cap NYSE indices, and NASDAQ, even with its move back over the 200 day SMA on Friday, did not move past those prior rally highs. That leaves a major challenge for the week ahead for the rally to survive. Either new leadership in the small to mid-caps takes over and drives the rally further or the large cap laggards will drag it down.
LEADERSHIP: Speaking of leadership, there was a continuation of the same theme from later in the week as some new areas asserted or reasserted themselves. Technology both large and small put up some decent gains. Growth areas in medical areas (biotechs, medical appliances and equipment) posted gains. Industrial stocks (and this does not mean large industrials) led all week. Small foreign financials were up once more. It did not hurt that some commodities and energy stocks scored gains to end the week even with the declines in the underlying commodity prices on the week. There are many smaller issues and overlooked large cap issues that are setting up nice patterns and moving higher, flying under the radar. Thus despite the sluggish upside last week, there is good promise ahead for the coming week.
Things are not great, but they aren't as bad as they are made out to be: welcome to the politics of economics.
Remember back in 1992 when the recession from 1991 (the economy was already pulling out of recession in 1992) was described by some as the worst since the Great Depression? Please. Classic election year hyperbole. It was in fact one of the shallowest, but everything is magnified and distorted in election years. It is similar to a court case where both sides highlight and argue the points they view as the most important to the case. They are often arguing about the same facts but the presentation based upon perspective is truly different. You can take any angle, any data point, and build an argument. As we always try to do here, however, you have to take it all into account and not cherry pick an indicator or data point and build a case around it.
Right now the economic data is not that great. It shouldn't be, however, given that the economy is still in a slowdown and is not even a year out from the credit issues that put economic activity in a deep freeze for several months in 2007. To think they should be roaring ahead so quickly is rather absurd simply because it takes time for that freeze to ripple on through the economy.
At the same time, the economic condition is nowhere near as bad as it is made out to be each night on the news. There are indeed serious problems with oil over $120/bbl (closed at 127.71 Friday) and food prices surging given we have opted to tie our food prices to energy prices, but the data also tell you that the economic times, while down, are not the typical stuff of major slowdowns.
The Friday data underscore that. Consumer spending and income rose 0.2% for April, down from 0.4% in March and stood at 0% when you factor in inflation. Since the start of 2008 and the mediocre GDP growth exhibited, however, consumer spending is still flat to trending slightly higher and NOT declining as the media would have you believe. Those big energy price increases and the declines in home prices are not sending consumption negative, but have only slowed the growth in spending. Not bad given spending will only increase over the summer into September as the stimulus checks fans out across the nation.
The key takeaway from this data is that while spending and income point to sluggish economic conditions, there are not those negative readings that are so pernicious and are associated with serious declines in economic activity.
Michigan sentiment stays in the 50's.
But what about consumer confidence and its impact on spending? Both the Conference Board's reading and the University of Michigan show confidence levels in the fifties, and that is historically associated with recessions. What about a recession now?
By our measure of a recession, we have been in one. We said that back in Q4 when the market peaked and rolled back down given all of the volatility we were seeing. To us a recession is not the textbook two quarters of negative GDP growth but the relative decline in economic activity from the growth trend. After humming along at 3.5% to 4.5% growth rates, a decline to 1% or less GDP is a recession. All of the market volatility and the pullback in economic indicators showed a significant change in the growth trend that would be more than just a normal pause in a continuing uptrend.
The consumer sentiment indicates that as the case even as GDP has held positive though well off its prior established growth trend. Is this lower sentiment predicting a recession to come? Conventional wisdom would say that if the consumer is worried spending will contract and that will translate into slowed consumption in the future and thus even slower economic activity than seen to this point. Indeed that is what you hear right now on the financial stations with respect to the housing shoes still to fall.
Historically, however, sentiment is lagging because it is an emotional indicator. It remains suppressed or declines further even as the economy begins to improve. Levels in the fifties are associated with recessions, but they hit those levels after the damage is done. Just as corporate CEO's remain pessimistic even as the economy recovers and their own numbers improve, the consumer remains emotionally battered even as things recover simply because you are not where you were before the economy hit the skids. Thus, while sentiment continues to slide and this is a cycle low for Michigan sentiment (78.4 in January and a constant slide since basically the start of 2007), it does not presage further economic weakness in itself.
Improvement in the economic foundation has been priced in. Is there more?
As discussed Thursday, the foundation in the economy is improving as certain pieces fall into place, e.g. a top in gold, a higher low in the dollar, a breakout in real interest rates (i.e. not inflation), some serious distribution in oil. Those are all positive set ups for further economic improvement.
The market has priced in this economic improvement, or should we say, the lack of a serious further economic slowdown as GDP skirts negative and the Fed's innovative actions taken last year and early this year (in particular this year) thawed the credit market and put that part of the economy on the road to healing. Hence the March bottom in stocks coincided almost perfectly with the Fed action re BSC and its broader use of facilities to get the liquidity to where it was needed by letting just about anyone bring their junk collateral to the discount window, get a 28 day swap for money, and thus conduct business as necessary. The inability to do this is what killed BSC; the Fed took the steps to ensure none others would fall in that manner.
Is this economic set up going to lead to more growth or has the stock market priced this in already and this last leg higher and the failure to make a new rally high indicates that there is no more? After all, oil sold hard and was under distribution, but it did not break its trend. It closed at 127.71, bouncing back 1.09 Friday after some nasty downside sessions the past week. It is under duress, but unless it falls near 100 the economy, and thus the market rally, are in jeopardy. When oil spiked to 135 we found the choke point. It needs to back off sharply from that for the economy to really benefit.
ECRI, the best human index for predicting economic cycles, was up the past week, hitting a 22 week high. That, however, left it at -6%, still indicating the same kind of recession-like sluggishness the economy is feeling right now. Not a nasty tank lower but not much of a recovery there either.
Indeed, the slowdown, as noted above, was not this massive turn to negative GDP growth or the same kind of 10% GDP to negative GDP growth rates seen in the last Greenspan recession from 2000 (though you could call the current one his as well given the sorry state he left things in). No big slowdown means no big backlog of pent up demand that is typically the catalyst for a strong recovery. Modest slowdown, modest recovery. Equal and opposite reaction.
That could very well be one of the probable paths ahead, particularly with the type of stimulus the federal government decided to bestow upon us. This is the same kind of rebate methodology that failed to stimulate the economy in 2001 and 2002; it took the business side stimulus to unlock the economic potential once more. A bit more of the same would not hurt, particularly given the continuing pundit angst over housing. Will a few hundred dollars change consumer buying habits if their home values continue to fall as they need to do? Of course not. Better to give businesses, small and large, incentive to invest to create new jobs and hire more workers. That is how you get a recovery ramped up.
Thus the current market rally needs that something extra to get it going. We noted that Thursday when we said that a break in oil's uptrend would be the goose the market needed. That did not come last week despite some ugly downside sessions in oil. Thus the market is holding back as it needs something new to price in. Some might even say its failure to make new rally highs even as oil struggled suggest oil is not going to break its trend. That means we just have to wait and see if that occurs, watching how leaders perform in the interim.
By: Jon Johnson, Editor