Sellers Getting Stronger After Tepid Economic & Earnings Data
Once again, sellers are showing up, after a 2.5 month hiatus, and putting pressure on several key areas of the market. Short-term, the major indices rallied right into major resistance (prior chart highs) and are now pulling as the pause to digest the strong rally from Feb’s low. Economic and earnings data remains tepid at best which is not ideal considering every major central bank in the world has adopted an easy money stance. Essentially what is happening in capital markets is that the strong dollar trade is reversing. After markets sold off in January/early Feb, the Fed did a 180 and returned to its dovish stance. That caused the US dollar to fall and a slew of beaten down areas to rally. The entire strong dollar trade we have seen since the summer of 2014 is being unwound.
We are seeing big money mainly flow into: gold, silver and steel stocks. Energy and other commodity stocks are also acting well but pale in comparison to the strong performance in gold, silver and steel stocks. Outside of those areas- the rest of the market looks suspect. On average, growth stocks are getting hammered, semiconductors look toppy and sold off hard last week, housing stocks are pulling back, biotechs look awful, retail (XRT) stocks broke the 50 DMA, we can go on and on but we trust you get our point. Intermediate and long term there are one of two possible scenarios that may unfold: A. The major indices are building a long 1 year base and a breakout above resistance (2134 in the S&P 500). If that occurs, that will likely be bullish and trigger a new leg higher. B. This is one big top after a 7 year bull market and support breaks (1810-1820 in the S&P 500) and we enter a new bear market. In February we were headed for the latter scenario but global central banks, once again, interfered and saved the day. Most likely, if the former scenario unfolds, the breakout will be caused by easier monetary and/or fiscal policy. Until then, we have to expect this wide and loose very choppy action to continue and we will maintain a relatively cautious stance.
Stocks ended lower on Monday as investors waited for a busy week of “data.” On Wednesday, the Fed will conclude its latest 2 day meeting, on Thursday U.S. GDP will be announced and the Bank of Japan (Japan’s Central Bank) will conclude its latest policy meeting. Plus, it will be another busy week for corporate earnings. Overnight, two big stories broke from Asia: First, the FT reported that China’s total debt rose to a record 237% of GDP according to the FT. Second, Bloomberg reported that The Bank of Japan has become the Tokyo Whale and currently owns about 10% of the Nikkei 225 index. We have said for a long time Central Banks are buying stocks, now it is confirmed.
Stocks were relatively quiet on Tuesday as the Fed began its two day meeting and investors digested the latest round of mixed earnings and economic data. U.S. durable goods orders rose +0.8% in March, missing estimates for a gain of +1.6%. Consumer confidence fell to 94.1, and missed estimates for 96. The PMI Service Flash index came in at 52.1, almost inline with the Street’s estimate of 52. The S&P Case Shiller Index came in at 0.7%, matching estimates for 0.7%. Meanwhile, the Richmond Fed Manufacturing Index came in at 14, beating estimates for 12. After Tuesday’s close Apple gapped down after reporting another lousy quarter. Stocks opened lower but closed mixed on Wednesday after the Fed reiterated its easy money stance and investors digested a slew of earnings data. Separately, Crude oil hit a fresh high for 2016 which helped a slew of energy stocks continue to rally. On the economic front, pending home sales came in at 1.4%, beating estimates for 0.5%. At 2pm EST, the Fed concluded their latest meeting and reiterated their market-dependent and cautious stance.
Before the open, stock futures were lower after the Bank of Japan (BOJ) decided to do nothing at their latest meeting. Some investors wanted to see them do more, hence the initial sell-off. At 8:30am EST, the government said U.S. GDP grew by only +0.5%, missing already reduced estimates for +0.7%. The weaker than expected GDP report clearly means more easy money from the Fed. That put a little bid in the market. Earnings remain a mixed bag, shares of Facebook (FB) gapped up after smashing estimates and a slew of stocks gapped down after reporting numbers (DPZ, PRLB, HAR, GNC, just to name a few). Stocks fell on Friday after the latest round of economic and earnings data was released. We are beginning to see several key areas begin to breakdown which is something we are going to watch closely as we head into the always fun: sell in may and go away season.
Market Outlook: Pullback Mode
Stocks are pulling back as the S&P 500 pulls into its 50 day moving average. Economic and earnings data remains less than stellar but all that matters now- is easy money from global central banks. As always, keep your losses small and never argue with the tape.