Wednesday, April 16, 2014

Is It All About The Yen?

If you haven't noticed lately, our market seem to be the most highly correlated to moves in the Japanese Yen.  Yesterday markets were down sharply and then when some news came out that caused the Yen to weaken, stocks immediately bounced.

This notion goes to the "carry trade", which we won't delve into today, but basically a lot of global money is invested predicated on the Yen remaining weak.  Anytime the Yen starts to rally it spooks global investors who selloff risk assets (like stocks) in response.

Over the last week a stronger yen has pressured stock markets, but yesterday news broke that Japan may be set to downgrade its economic assessment of its economy.  This would likely result in more stimulus and a weaker yen.  And like clockwork, stocks rallied.

This morning the yen is lower and our stock market is higher.  We are not saying it is the only variable moving markets these days, but the inverse correlation is certainly one to pay attention.

In terms of China, their Q1 GDP figures out last night showed their economy grew 7.4%.  This is slightly above consensus estimates, but still starting to fall below the longer-term 7.5% target for the government.

Turning to the US, there was another handful of earnings reports last night as earnings season heats up.

Stocks rising on earnings: YHOO, INTC, IBKR, GWW, ABT, PNC

Stocks falling on earnings: BAC, CSX, LLTC, FRC, USB, STJ

Trading comment: The stock market is bouncing for a third day, but most of the major indexes remain below their 50-day averages.  We have said repeatedly that corrections don't come in a straight line.  So the type of bounce we are seeing is normal.  But that doesn't mean we should be lulled into a sense of complacency.  Given how long the last runup has been, it is unlikely that this recent pullback has run its full course.  We still expect more choppiness to downside action ahead and are maintaining our defensive posture for the time being.

Tuesday, April 15, 2014

Stocks Reverse Early Gains

Stocks bounced in the first hour of trading, but so far the enthusiasm looks short-lived as the indexes have given up their early gains and trade back in negative territory.

Earnings season has started, and results this morning were mixed.  On the positive side were bellwethers like KO, JNJ, and SCHW.  But negative reactions to earnings were seen in INFY, PBY, SXT, ZBRA, and NTRS.

Economic data wasn't great either.  The April NAHB Housing Index rose one point to 47, but that was below expectations.  And the Empire Manuf Survey for April fell to 1.3 from 5.6 the prior month.  CPI data also showed that housing costs rose 2.7% over the last 12 months, the largest yearly increase since March 2008.

The economic data and market action looks to be weighing on bond yields.  The yield on the 10-year Treasury has dropped back to 2.62%.

There are also more reports out of the Ukraine that are worrying investors.  Obama spoke to Putin last night by phone, but the call was said to have produced little in terms of results.

Asian markets were lower overnight, with China down -1.4%.  China releases Q1 GDP tonight and some economists now expect them to miss the 7.5% target.

Commodities are also lower today.  Gold is not seeing any flight to safety and prices are dropping back to the $1300 level.  Oil prices are only slightly lower near $103.75.

The volatility index is not up as much as we would expect given the backdrop, and is only 1% higher currently to the 16.25 level.

Trading comment: Yesterday's rally and this morning's bounce came on low volume.  The SPX rallied up to its overhead 50-day average before running into resistance.  This is textbook technical action and tells us that the market still has more work to do in this correction.  News out of Ukraine continues to cloud the geopolitical landscape, as does the hard landing talk in China.  We continue to adhere to our defensive stance, have added to some hedges in certain instances, and think a better buying opportunity will come.

Monday, April 14, 2014

Monday Morning Musings

Markets are opening on a higher note this morning following last week's selloff and some positive economic and corporate news.

Over the weekend tensions in the Ukraine escalated with the country's army facing off against pro-Russian troops.  This had European markets lower this morning before trading in the US began.

But better than expected earnings from Citigroup helped boost the financial sector.  And the March retail sales report came in stronger than expected also.  This gave a boost to stocks in the US, and the Dow currently sits with a 100-point gain in early trading.

Asian markets ended mixed overnight.  Singapore's GDP rose 5.1%, as expected.  And China's vice minister of finance said Beijing will not enact new stimulus measures just to deal with short-term volatility.  The IMF recently warned that China could experience a hard landing.

In Europe, the ECB President said that the central bank stands ready to act and that continued strength in the euro will likely be met with stimulus measures.

Commodities are higher this morning, with oil prices up to $103.90 and gold prices higher near $1330.

The 10-year yield is getting a little bounce to the 2.65% level.  And the volatility index is falling 5% so far down to 16.15.  Last week the VIX touched 17.85 before reversing.

Trading comment: The market was short-term oversold coming into this week after last week's sharp selloff.  While this morning feels good, investors shouldn't be lulled into a sense of complacency.  The major indexes are all well below their 50-day moving averages, which tells us that we should still be in defensive mode.  Selloffs and corrections don't come in a straight line, so bounces along the way are a normal part of the correction process.  But this pullback likely has more time to put in, and solid bottoms come from retesting the lows and forming a new base.  That process is still ongoing.  As such, patience is the prescription of the day.

Thursday, April 10, 2014

Greece Returns To Bond Market After Four Year Absence

Markets are trading lower in early trading.  Stocks had enjoyed a 2-day bounce, but some cited the low volume on those up days as evidence of lack of conviction among buyers.

Biotechs and other momentum stocks are once again the weakest.  Most sectors are lower in early trading while defensive consumer staples and utilities buck the early weakness so far.

In corporate news, a couple retailers reported earnings and both stocks are lower.  BBBY lowered Q1 guidance and its stock is down -6%.  FDO missed estimates and also lowered guidance.

Jobless claims came in lower than expected, but that isn't providing any support to bond yields, where buying in Treasuries is pushing the yield on the 10-year Treasury back down to 2.65%.  Bond yields recently looked like they might be embarking on a renewed uptrend, but the last several days has put a question mark on that thesis.

Asian markets were mostly higher overnight.  China's imports and exports both fell by more than expected, but China's Customs Office is trying to downplay the figures saying that Q2 will rebound.  To us this looks like another potential warning sign on the China slowdown.

Europe's markets are mixed this morning.  On an important day, Greece returned to the bond market yesterday for the first time in 4 years.  They raised 3 billion euros in a bond auction being called a "triumph" by govt officials.  The Finance Ministry said that most of the issue was bought by foreign investors.

In many ways, Europe looks to be on the mend from its credit crisis that ended last year.  Confidence is the name of the game, and if folks feel good about sovereign debt in Europe then that is a big boost.  And confidence doesn't seem to be lacking at the moment judging by the low level of bond yields in many peripheral European countries.

Trading comment: The 2-day bounce in stocks felt good but it did come on lower volume which is never a big positive.  Today it feels like we are right back to where we left off on Monday as the selling intensifies.  Many high growth stocks are getting hit hard today, as well as biotechs which are down across the board.  Aside from the S&P 500, the Nasdaq, small- and mid-cap indexes remain below their 50-day averages.  As such, we continue to remain in defensive mode until we see more signs that this correction has run its course.

Tuesday, April 08, 2014

Nasdaq Bounces, Biotechs Lag

The markets started off on a weak note again this morning, but have since bounced into positive territory.  The Nasdaq is leading the bounce back as dip buyers step into tech stocks.  But biotechs continue to lag and underperform the Nasdaq.

There hasn't been any major economic or corporate news overnight.  Earnings season starts soon and for the most part the bar has likely been lowered for many stocks mainly due to the fact that stock prices have pulled back in the last couple of weeks.

Overnight, Asian markets ended mixed.  Japan sold off after the Bank of Japan made no changes to its policy stance and did not see the need for additional stimulus at this time.  China rallied even though the People's Bank of China also does not have plans for any immediate monetary easing.

Europe's markets are also lower today.  Great Britain's industrial production rose 0.9%.  And Swiss unemployment fell to 3.3% from 3.5%.

Commodities are higher with oil prices near $101 and gold prices bouncing to $1310.

The 10-year yield is holding the 2.70% level so far.  And the volatility index was higher earlier but has reversed lower as stocks have started to bounce.  It is currently trading near 15.10.

Trading comment: The S&P 500 came down to test its 50-day average this morning and is seeing a bounce from those levels.  This is normal action, and as we know no correction comes in a straight line.  But the other major indexes are now below their respective 50-day average support levels and that likely means it makes more sense to remain defensive.  We could see stocks bounce from here a bit more, but then they will likely come down again and it is often at that juncture that investors are presented with a better buying opportunity.  Investor sentiment has also been on the complacent side and we would like to see signs of less complacency accompany the pullback.


Monday, April 07, 2014

Monday Morning Musings

Markets are off to a weak start following Friday's sharp selloff in stocks and weak overnight action in foreign markets. 

There was no economic news this morning, but bond yields are still moving lower on the weaker than expected jobs report from Friday.  The yield on the 10-year T-note is down another 2 bps to 2.70% and risking breaking back below its 50-days support.

In corporate news, Mallinckrodt (MNK) will acquire Questor Pharma (QCOR) for a 27% premium to Friday's closing stock price.

Asian markets traded lower overnight.  China was closed for a holiday, but the World Bank lowered its 2014 GDP forecast for China to 7.6% from 7.7% and maintained its 2015 forecast at 7.5%.

European markets are also lower across the board.  Pro-Russian supporters have seized government buildings in three cities in Eastern Ukraine and calling for an independence referendum.  The Russian MICEX stock index has been down as much as -3.5%.

Oil prices are down slightly near $100.88 and gold prices are also a bit weaker but holding at the $1300 level so far.

The volatility index only bounced back to the 14 level on Friday.  This morning it was moving higher slowly and is now finally above the 15 level, up 9% on the day.  For reference, in March the VIX climbed to the 18 level before topping.

Trading comment: In recent weeks we saw the Nasdaq break below its 50-day but the S&P 500 did not follow suit.  At the time we said you had to respect the price action, but now it looks like it was short-lived.  The Nasdaq and the Russell 2000 small-cap index both broke below their 50-day support levels on Friday.  The S&P 400 Midcap is close.  And considering Friday's high volume negative reversal, we think the odds have increased that the S&P follows suit this time.  The selling is concentrated in high growth names right now, and rotation into more defensive stocks has likely kept the broader indexes from falling as hard.  But if the selling continues it will likely reach the defensive names too and that is why we continue to tread defensively in the near-term.




Friday, April 04, 2014

Bond Market Not Impressed With Jobs Numbers

The government payrolls report out this morning showed the economy added 192,000 jobs in March.  This is not a bad figure, although it was below consensus estimates.  And the unemployment rate held steady at 6.7%.

So if the bond market thinks the economy is improving why are bond yields dropping so much today? The yield on the 10-year Treasury is dropping all the way back to 2.72% after reaching 2.80% yesterday and looking like yields were in a new uptrend.

In Europe, although there has been much talk about the economic recovery taking hold, the ECB is contemplating a quantitative easing program.  And there have been several datapoints pointing to a slowdown in China.  So the tealeaves of the global economic recovery remain mixed, although the Fed remains on target to reduce its asset purchases throughout the year.  Maybe the Fed has more confidence in the US economy than the bond market, at least today.

The volatility indexes are confusing today also.  The VIX is down again near the 13 level, but the Nasdaq volatility index (VXN) is more than 8% higher today to 18.40. 

So money continues to rotate out of high beta stocks and into more value type stocks.  The S&P 500 has been flat to positive most of the day while the Nasdaq is down quite a bit and breaking back below its 50-day average.

Trading comment: Although the last couple of days looked like the uptrend would resume, the pressure that has resurfaced in the Nasdaq is still an area of concern to us.  The rotation into more defensive areas of the stock market could just be initial complacency.  But the risk remains that the selloff in the high growth stocks spreads to the overall market.  As such, we continue to adopt a prudent stance.

Wednesday, April 02, 2014

The Uptrend Resumes

Lately we had raised the caution flag about stocks due to the action in leading stocks and how most looked to be entering into corrections.  But you have to respect the price action, and yesterday the S&P 500 closed at a new high.  This morning we are seeing some follow through, and the S&P 400 midcap index is also at new highs.

In economic news, the ADP Employment report showed the private sector added 191,000 jobs in March.  That was slightly below expectations but still a solid overall number and above February's revised figure of 178k.  We will have to see how well it correlates to Friday's govt payrolls report.

Bond yields are moving higher on the employment report with the 10-year yield back to 2.80%.  That's nearly a 1-month high in yields, and if you look at the chart of the 10-year the pattern projects higher yields in the near-term.

Asian markets ended higher overnight.  According to Shanghai Security News, some smaller Chinese cities are debating lifting certain property curbs in order to prevent a downturn in housing.  This is another risk to the Chinese economy-- trying to slowly let the air out of a huge property bubble.  But history doesn't bode well for successful soft landings when bubbles burst.

European markets are mixed today.  Eurozone GDP was revised down to 0.2% from 0.3%.  The IMF's Lagarde said the ECB needs to provide more monetary easing.  The ECB will release its latest statement tomorrow morning.

Oil prices are lower near $99 while gold prices are higher today around $1291.

Trading comment: While most of the excess cash we have been investing of late has gone into alternative funds and more defensive investments, the breakout to new highs in the SPX has caught our attention.  We will be looking for new areas of leadership in the market.  One area that seems to be leading the early action is the transports, as the IYT breaks to new highs.

Tuesday, April 01, 2014

More Signs Of Trouble In China

The markets are enjoying a strong rally in early trading.  This is often seen on the first trading day of the month or quarter.  But given the declines in many leading stocks of late, I am surprised that the S&P 500 is knocking on the door to new highs.  But far be if from me to argue with a bull market.

In economic news, the ISM Index for March rose to 53.7 from 53.2.

Corporate data is light right now as we remain in the quiet period for companies ahead of the Q1 earnings reports that will start soon.

Asian markets ended mostly higher.  Japan was a bit lower after implementing its first sales tax hike since 1997.  In China, their HSBC manuf. PMI slipped to 48.0 from 48.1.  The PMI for China has now been below the 50 level for several months, indicating their manufacturing sector is in contraction.

Moreover, Tonghao New Board failed to make its coupon payment in March, representing the first default in the private-placement market for high-yield bonds.  This doesn't seem to be getting much press, but it markets another wheel that is loose on the Chinese economic truck.  With manufacturing slowing, the property market cooling, and non-performing loans on the rise we think a hard landing in China remains the biggest risk out there right now.

Europe's markets are also higher today.  Eurozone PMI held steady at 53.0.  France, Spain, and Italian PMI's all improved.

The 10-year yield is higher to 2.76%, a good sign for economic bulls that it stopped drifting lower. 

And the volatility index is moving lower again, down -3.5% to 13.40.

Trading comment: The early pop in the market is losing some steam as this post goes to press.  We will have to wait and see how today's session finishes up and if the market can close at its highs.  The price action has to be respected and it is possible that the rotation pattern we saw last year is back in effect and while the high flyers enter their corrections money flows into other sectors that will carry the leadership baton for the next leg higher.

Monday, March 31, 2014

Monday Morning Musings

Markets are higher in early trading and seeing a nice bounce so far.  Its hard to pinpoint a catalyst today so this could just be month end and quarter end effect in action.

Over the weekend, Putin called Obama to discuss the Ukraine situation.  While no big news came out of it, at least the dialogue can be viewed as a step towards diplomacy.  But the news didn't lift Asian markets or have much of an effect in Europe, so we can't look at that as the catalyst for stocks today.

In economic news, the Chicago PMI for March ticked down to 55.9 from 59.8.  So that isn't boosting the market either.

Fed Chairman Yellen spoke this morning and reiterated that the Fed remains short of its employment and inflation goals and that the economy requires 'considerable support for some time'.

Asian markets were mixed overnight.  Japan's manuf PMI fell to 53.9 from 55.5.  China was lower after continued reports about nonperforming loans weighed on investor confidence.

Europe's markets are slightly higher today.  French GDP rose 0.3%.  German retail sales rose 1.3%.  And the president of the Bundesbank said the eurozone is not in a deflationary cycle, which would decrease the odds of the central bank enacting an asset purchase program.

The 10-year yield is higher today to 2.74%, trading back above its 50-day average.

The volatility index is lower by 3% back to the 14 level. 

Most commodities are lower today with oil down slightly to $101.45 and gold lower near $1292.

Trading comment: Last week we saw a continuation of many leading stocks breaking down and entering corrections.  Most of the time that means the broader market is also likely entering a correction.  The Nasdaq is already below its 50-day average support, and the Russell 2000 is struggling around its 50-day.  So we want to maintain a somewhat defensive posture here and give the markets more room.  The S&P 500 looks to be in good shape technically, which could be from sector rotation out of high growth stocks into more dividend-type value stocks.  But we would still like to see how things shape up past quarter end and as we get into April and approach tax season.