Rising Yields Spook Investors

Bond yields started to spike yesterday, which took a little steam out of the stock market rally.  But today markets are sharply lower on what looks like continued fear about rising rates.  Bond yields rose in Asian markets as well as Europe as well.  And trading in closed end bond funds yesterday really showed the skittishness among investors.

Interest rate sensitive sectors are down the most.  Trading in some of the REITs is showing extreme volatility, while utilities are the weakest sector so far.  I think this is likely an overreaction, and when the dust settles yield-hungry investors and those with cash still on the sidelines will look to come in and buy beaten down REITs and utes.

Asian markets were mixed overnight.  The Bank of Thailand became the latest central bank to lower interest rates, cutting their key rate 25 basis points to 2.50%.  The IMF lowered its forecast for Chinese GDP growth to 7.75% from 8.00% in 2013 and cut the 2014 outlook to 7.75% from 8.20%.

European markets are also lower today, as sovereign bond yields are on the rise.  Germany's unemployment rate held steady at 6.9%.

The dollar is lower this morning but commodities are mixed.  Gold prices are higher near $1388 while oil prices are lower to $94.63.  Copper prices are lower as well.

The 10-year yield is higher to 2.14%.  It last touched these levels in early April, but next major resistance doesn't come into play until around the 2.40% level.

The volatility index is nearly 8% higher this morning, above the 15 level we have been watching to 15.65 currently.  A couple of closes above the 15 level would increase the chances of a further pullback in the stock market, while a reversal back below the 15 level would likely embolden the bulls to do more buying.

Trading comment: The S&P 500 has erased yesterday's gains but is still above the lows from last week.  The SPX touched 1635 last week, so that is a short-term level worth watching.  A break below those levels would be a rare lower low on the weekly chart, at least in recent months.  We are still looking for one last spurt higher by the market closer to the SPX 1700 level before quarter end, though the short-term timing is always difficult.  If that rally materializes, and if it brings out more bullish sentiment that would certainly increase the odds for a summer correction.  I think most strategists are only looking for a mild pullback, but as the herd is often wrong we would not be surprised to see something that rattles investors confidence a bit more.  But let's not put the cart before the horse.

Bullish Sentiment On The Rise

After a 3-day pause in the markets, stocks are back in rally mode this morning.  This isn't all that surprising given that this has been the pattern all year.  We used the weakness Thursday and Friday morning to do some buying for this reason.

In economic news, consumer confidence for May rose to 76.2, well above expectations and above the prior month's reading of 68.1.  Also, the Case-Shiller Home Price index rose 10.9% on top of the prior months 9.3% increase.

Asian markets were higher across the board overnight.  And European markets are also higher today.  An ECB board member said the possibility of further easing remains on the table despite the recent rate cut.

The dollar is higher today and commodities are mixed.  Oil is higher near $95.50 while gold prices are lower around $1377.

Bond yields are moving higher today with the 10-year yield spiking to 2.11%.  These levels mark the highest yields in over a year, since April 2012.

Trading comment: Bullish sentiment has been slow to rise, but is now getting to levels that raise a yellow flag for this market.  We could certainly still see investor sentiment grow more bullish in the near-term, but if that were to happen it would likely increase the odds of a more meaningful correction this summer.

Here are some of the indicators nearing extreme levels:  The Investor's Intelligence survey is showing the spread between bulls and bears at +36% (55% bulls, 19% bears).  That is a 2-year high for this indicator.  The AAII individual investor survey spread is at +27%, which is the second highest reading this year and also near an 18-month high.  And last week the Market Vane survey showed bulls hit 70%.  That is the highest reading this entire bull market!  You have to go all the way back to 2007 to find another reading in the 70s.  So investor sentiment is no longer skeptical, and is now getting more complacent.

In the short-term, the CBOE put/call ratio topped 1.0 in each of the last 3 trading days.  So it's not surprising to see the market rally off that short bout of pessimism.  I think bullish sentiment can continue to build for awhile, possibly thru June into quarter.  But I continue to think it raises the odds for a summer correction.  Stay tuned--

A Rare 3-Day Losing Streak?

The market is currently lower for a 3rd day in a row.  Normally that wouldn't be very surprising, but this year has been anything but normal.  Over the last 5 months of trading, there has only been one 3-day losing streak in the S&P 500.  Today could be the second occurrence, although its still early in the day.

The above doesn't hold too much significance, imo.  Rather it is just an interesting market anecdote.  The market had simply become too extended, trading at levels more than 6% above the 50-day average, which is rare.  So a pullback was in the cards and well overdue.  That said, we don't expect this pullback to be more than just a garden variety pause that relieves the overbought condition.  We expect underinvested portfolios managers to buy the dip going into quarter end.  If we are due for a larger correction, we would look to the summer timeframe to get more worried.

In economic news, April durable goods rose 3.3% after a -5.9% decline in March.  Ex-transportation, durable goods still rose 1.3%.

Asian markets were mixed overnight.  The BoJ governor said that they don't have a specific target for stocks or currency rates.  But reports out overnight suggest the BoJ was again providing liquidity to the Japanese bond market.

Europe is also trading mixed to lower today.  The second estimate of Germany's Q1 GDP held at 0.1%.  Not very good for the country that is supposed to be the glue of the Eurozone.

Commodities are lower again.  Gold prices are down near $1386, and silver and copper are lower as well.  Oil prices are weaker to $93.50 and ag prices are lower.

The 10-year yield is slightly below the 2.00% level.  And the volatility index is 4% higher today at 14.65 but still below the 15 level that we have been watching.

Trading comment: We are using this 3-day dip to continue to add to equities.  We trimmed more of our fixed income ETFs and have added to stocks such as ARCP, EOG, and URI this week.  Should the market continue lower next week we would look to do more of the same.  Our forecast is that the market will pause and consolidate here but will stage another advance into the quarter end timeframe.

KAM Advisors has long positions in ARCP, EOG, and URI

Is The Japanese Rally Over?

Markets are lower this morning on some panic selling overseas which weighed on stocks here in the US for a second day.  This overshadowed some positive economic data with jobless claims lower than expected and new homes sales for April coming in well above expectations.

Last night Japan saw a huge 7.3% plunge in the Nikkei.  The selling started after trading in the Japanese Govt bonds had to be halted.  The strengthening yen exacerbated the pressure and the Nikkei saw a drop of 1500 points from high to low.  It also probably didn't help that China's HSBC manufacturing index fell back into contraction (49.6) for the first time in seven months.  The Bank of Japan finally moved in and injected 2 trillion yen to calm markets.

Of course, Japan's stock market has enjoyed a huge rally since the BoJ announced its massive quantitative easing program there.  At some point you expect some profit taking, but this large decline shows what happens when stocks get extended and everyone tries to hit the sell button at the same time. 

Europe had some positive data in the form of higher than expected PMI manufacturing readings, but overall he region is still in contraction.  Spain auctioned off 3-year and 5-year debt at higher yields than its previous sale.

The dollar is surprisingly lower today and commodities are mixed.  Gold is higher near $1385 as is silver.  Copper prices are lower and oil prices are also weaker to $92.65.

The 10-year yield is above the 2.00% level after a big upside reversal yesterday following the Fed minutes. 

The volatility index hit the 15 level this morning for the first time in a month.  If it closes above 15, I would expect more selling.  But below that level is likely more of the same.

Trading comment: We already did some trading this morning, taking advantage of the dip for a second day.  So far this year, the S&P 500 has only had one 3-day losing streak.  That means the odds favor buying day 2 of the weakness, if only for a bounce.  That streak could be broken tomorrow, but we are taking advantage of a few stocks that have pulled back to attractive levels.  Some of the REITs had very sharp 2-day pullbacks also.

Market Cheers Bernanke Comments

Many investors were concerned about today's testimony before Congress by Fed Chairman Bernanke.  Most figured his comments about how soon the Fed would end its quantitative easing program would unnerve the market and stocks could be vulnerable to a selloff.

But in this market, any news is good news.  Bernanke reiterated that the decision to slow purchases would be dependent on incoming economic data.  He said that he believes the Fed could also allow current assets on its balance sheet to run off (or mature) without having to engage in outright sales.  This might be less disruptive to markets.  Although the market is fading as I write this post, the Dow was up more than 100 points after Bernanke's comments were televised.

There has also been quite a bit of volatility in the bond markets.  The 10-year yield started off the day around the 1.90% level, but recently spiked back above the 2.00% level.  So it should be interesting to see where the stock and bond markets settle out by the close.  Stocks are certainly short-term overbought, but have been this way for roughly a week now.

In other economic news, April existing home sales hit a rate of 4.97 million units which is up from last month's rate of 4.94 million units.  Homebuilders are rallying on the data.

Asian markets were mostly lower overnight.  But Japan rose again after the latest Bank of Japan meeting where the central bank noted that the "economy has begun to pick up".

Europe's markets are mixed today.  The Bank of England saw a vote on maintaining its asset purchase program split with 3 members in favor and 3 members opposed to it.

The dollar is higher this morning, and commodities are mixed.  But trading is volatile and prices are moving around quickly.  Gold was near $1400 earlier but has given back $25.  And oil prices are back below $95.

Trading comment: I know it has been a losing game to look for a market pause, but the recent action has caused the indexes to become highly extended vs. their 50-day and 200-day moving averages.  The SPX hit the 1675 level today, and I do think we should see some consolidation in the averages before another run to the 1700 level.  In the meantime we continue to find individual situations where stocks have pulled back to offer attractive entry points. 

Stocks Pause For Second Day

The markets are slightly lower this morning.  Yesterday stocks finished slightly lower also, but after such a big rally one might expect to see a larger pullback or more profit taking ensue.  But this has not been the case for months now.  It's still early today, but the odds favor more of the same.

There is no economic news of note.  There have been a handful of earnings reports.  Stocks rising on earnings include AZO, DKS, HD, and SKS.  Two stocks lower after reporting are URBN, and BBY.

In other corporate news, JPMorgan stock is leading the financials today after the vote to split the Chairman and CEO role for Jamie Dimon has been voted down.  Dimon threatened to leave the company if the Chairman role was taken away from him.

Also, Apple's CEO is testifying before Congress about its tax policies and international tax shelters.  As a shareholder, I want the CEO to minimize taxes.  If Congress is opposed to it, they should either close any loopholes or revise tax treatments to make repatriation more favorable.  That would generate billions in tax revenues and create more jobs and investment in the US.  Current policies are destructive and uncompetitive.

Asian markets were mixed overnight.  Malaysia's unemployment rate rose to 3.3%.  Europe's markets are mostly lower.  The European summit is set to begin tomorrow, and Germany's Merkel is considering a treaty that would give more power to Brussels.

Among sector ETFs, healthcare and financials are leading so far while tech and utilities are lagging.

The 10-year yield touched 2.00% this morning but has pulled back slightly from those levels.

The dollar is higher and commodities are weak again.  Gold staged a bug upside reversal yesterday, but so far there has been no follow through and gold prices are once again lower and testing the $1365 level.  Oil prices are weaker near $96.30.  Silver and copper prices are down also.

Trading comment: The more the market runs up, the greater than chance of a sharp correction at some point.  But at what point remains the $64,000 question.  Investor sentiment has grown more bullish, but it is still far from extreme levels as many investors continue to view this rally with skepticism.  So the market continues to climb the wall of worry.  If I had to guess, I would say a true correction probably won't hit until summer.  But that doesn't mean we should get complacent.  It just means that there are still opportunities in this market.

KAM Advisors has long positions in AAPL and JPM

Monday Morning Musings

Markets are slightly higher this morning after another rally Friday to record levels.  Last Thursday the market started to pull back, and many folks were hoping for at least a little correction.  But stocks came roaring back on Friday continuing to frustrate those hoping for a better buying opportunity.

There isn't much in the way of market moving news out this morning.  The big news this week will be Bernanke's testimony before Congress.  Many investors are wondering when the Fed will begin to taper off their asset purchases and will be paying close attention to Bernanke's comments in that regard.

There was some M&A news this am with Yahoo buying social network Tumblr for $1.1 billion.  That's a pretty nice price tag.  To be honest, I've heard of Tumblr but never looked at the site.

Asian markets were higher overnight.  China new home prices rose 4.9% yr/yr.  Hong Kong's unemployment rate held at 3.50%.  And Japan said its economy is "gradually improving".

Europe's markets are mixed today with peripheral markets lower.  Anti-austerity protests were staged in Rome over the weekend.

The dollar is lower today after a big spike Friday, but commodities remain challenged.  Gold prices are a little lower near $1352, back down near April lows.  Oil prices are a bit weaker to $95.85.  But ag prices are breaking down to new multi-year lows.

The 10-year yield is down a bit to 1.94%.  And the VIX is up 5% but still hovering near this 13 level where it has been bouncing above and below for most of the month of May.

Trading comment: I feel like I have been saying the same thing about the market for weeks now.  While the indexes never seem to pull back in any meaningful way, there continues to be some group rotation beneath the surface.  Today for example, consumer stocks are pulling back while energy issues are rallying.  So there are trading opportunities around these rotations as certain sectors get overbought.  Also, stocks breaking to new highs from recent consolidations also are working well in this market.

Any News Is Good News

The markets started out lower this morning on some disappointing data, but quickly found their footing and so far have reversed higher back into positive territory.  I can't remember ever seeing this type of market resilience.  It's as if any news gets treated as good news, even when it shouldn't.

This morning's economic data was not great.  The Empire manuf. survey for May fell to -1.3 from last month's reading of 3.1.  Expectations were for it to rise to 3.5.  April industrial production fell -0.5%, below expectations.  And capacity utilization came in at 77.8% vs. 78.3% consensus.

Also, European data came out this morning wasn't great.  The Eurozone remains in contraction with Q1 GDP down -0.2%.  Germany ticked up to +0.1% while France was down -0.2% and Italy contracted -0.5%.

Asian markets were higher overnight, with Japan adding to its QE-inspired gains.  The Nikkei is up some 75% from its November lows, prompting the former vice-minister of finance to say the current move in Japanese equities is "somewhat bubbly".

The dollar is higher again today and that is weighing on commodities.  Oil prices are weaker near $92.35.  Gold prices are back below $1400 to $1395.  Silver and copper prices are lower as well.

The 10-year yield is steady at 1.95%, after reversing higher yesterday.  And the VIX continues to hover near that 13 level, implying continued low expectations for near-term volatility.

Trading comment: It's hard to find much to say with the indexes creeping to new highs everyday.  But beneath the indexes we do sense a small rotation out of the highly defensive dividend stocks like utilities and into more growthier type names.  Financials continue to perform well also.  It will be interesting to see if the investor sentiment surveys show any increase in bullishness this week or if folks continue to view this rally with skepticism.

The Tepper Rally

There really wasn't much news this morning to account for this rally.  Overseas markets were mostly lower overnight, and there was no big economic reports out today to speak of.  But hedge fund manager David Tepper made very bullish comments on CNBC this morning and that seems to have emboldened the bulls and put them in a buying mood.

Financials and biotechs are leading the early action.  Techs are lagging so far, as AAPL is having  a down morning so far.

Asian markets were mostly lower overnight.  India's inflation rate cooled to 4.89%, its lowest level since late 2009.  China's National Petroleum Corp. believes resource demand may wane in the medium-term.  That would seem to hint of an economic slowdown.

Europe's markets are also lower this morning.  Eurozone industrial production rose 1.0%.  Germany's ZEW economic sentiment ticked up to 36.4 from 36.3.  And ECB member Asmussen said he favors a swift creation of a "single European resolution regime".

The dollar is higher today, and that is weighing on precious metals.  Copper prices and silver prices are lower, while gold is mostly flat.  Oil prices are also flat near $95.

The 10-year yield is pausing today near 1.91% after a big multi-day spike.  And the volatility index is 5% higher today, which is odd given the rally.  But it is still only at 13.19.

Trading comment: We sound like a broken record, but this stair-step market continues apace.  After breaking above SPX 1600 around May 3rd, the market has shot up pretty quickly to reach the 1650 level (almost).  Folks calling for an imminent correction continue to be perplexed.  Who knows how long this rally can last?  But buying good market leading stocks on fresh breakouts or tests of support levels continues to work.  We continue to shy away from trying to pickups laggard stocks in hopes that they play catch up.

KAM Advisors has long positions in AAPL

Monday Morning Musings

The markets were mostly lower in the first hour of trading but are now more mixed as the Nasdaq has recouped its early losses.

In economic news, April retail sales surprised to the upside with an increase of 0.1% after declining -0.5% last month.  Also, in March business inventories were unchanged vs. expectations for a 0.3% increase.

Overnight, Asian markets ended on a mixed note.  Japan hits new 5-year highs while China and Hong Kong were lower.  Over the weekend the G7 meetings failed to point the finger at Japan for weakening the yen to gain a competitive advantage.  In China, industrial production rose 9.3% from 8.9% the prior month.  And Australian home loans rose 5.2%.

In Europe most markets are lower today.  The German finance minister said he opposes purchases of asset-backed securities by the ECB.  Swiss retail sales slipped -0.9%.

So far, defensive sectors like healthcare and consumer staples are bucking the weakness, while materials, energy, and industrials are lagging.

The 10-year yield is a little higher again to 1.92%.  The volatility index is up 1% but still at very low absolute levels of 12.75.

Commodities are mostly lower.  Gold prices are lower near $1432 and oil prices are also down around $94.75.

Trading comment: Its still early in the session, but for the last few days the markets have been doing more of the same.  The indexes are consolidating recent gains in a sideways fashion without really declining in any big way.  And underneath the indexes the rotation out of formerly defensive areas like utilities and into more growth areas continues.  So far, the 'Sell in May' folks have been sorely mistaken on thinking that pattern would show up in spades this year.  Calling tops in the market are even more difficult that calling bottoms.  One reason is that tops in the market are often more of a process, with several test of the markets highs while lows often times are more of a one-time event where the market plunges to new lows and then reverses from there on a surge in volume.  But for now we remain in that stair-step rally we have been describing all year.  Don't fight the tape.

Will The Market Ever Go Down?

Markets are up slightly again in early trading.  Overseas markets were higher overnight as well.  Yesterday, the market actually had a small down day, but if you pull up a chart you basically have to squint to see the pullback.  This has some investors scratching their heads and asking, "Will the market ever go down?"

I have been saying that with so many portfolio managers waiting for the proverbial pullback, that it was less likely we would see one.  In its perverse nature Mr. Market rarely likes to accommodate the masses.  More often it prefers to frustrate the majority.  And on that scale I would have to give Mr. Market an A+ so far this year.  I think few managers were overweight equities coming into the year, and thus not prepared for the incessant rally we have witnessed.  And I know this firsthand.

If this were a stock we were talking about, one would expect that the prolonged run-up might end in a climax run where the stock goes straight up over a short-time period as everyone throws in the towel and just says "get me in!".  I don't know if that is what we will see in the market as a whole or not.  The possibility of a melt-up is certainly being discussed, but the ongoing group rotation amongst the different S&P sectors makes it more likely that we will just see more of the same.

There wasn't a ton of news overnight or this morning.  The dollar is rallying hard as the yen falls to its lowest level since 2008.  That is weighing on the commodity complex with gold falling nearly $50 to $1420.  Oil prices are lower near $93.75.  Copper, silver, and ag prices are also down today.

The 10-year yield is getting another boost to 1.90%.  That's a pretty quick spike from the 1.65% level it hit last week. 

The volatility index is flattish so far still around the 13.15 level.

Trading comment: No changes to our recent comment strategy.  We continue to look for spots to add to stocks that haven't run too far yet.  Overall we are trimming those stocks like consumer staples and REITs that have had outsized runs and adding to growth stocks that could do better going forward.  Yesterday we trimmed some more GLD.

KAM Advisors has long positions in GLD

Is The Labor Market Really Improving?

The market is a bit lower in early trading, but the S&P 500 has been up for 5 straight days so a down day here would not be surprising at all.

In economic news, weekly jobless claims fell to 323,000 last week.  That marks the lowest claims level since January 2008, a pretty surprising statistic.  What is unclear is that although the unemployment rate has been falling recently, a big driver as been the declining labor force participation rate.  This begs the question, if the economy continues to improve will more people re-enter the labor force and slow the decline in the unemployment rate?

Overnight, Asian markets were modestly lower.  China's CPI rose 2.4% which was a bit higher than expected.  The Chinese press expects the govt. to enact plans aimed at curbing overcapacity.  The Bank of Korea cut rates 25 basis points to 2.50%.  Australia's unemployment rate fell to 5.5%.

In Europe, markets are also lower today.  The Bank of England kept its interest rates and asset purchase plans unchanged.  The ECB released its Monthly Report which pointed to downside risks and weak global demand as factors that could delay the recovery.

The dollar is higher today, which is weighing on most commodities.  Gold prices are weaker near $1465.  Oil prices are down slightly to $95.94.  Silver and copper prices are also lower, but ag prices are higher.

The 10-year yield is getting a boost today back to the 1.80% level.  It's overhead 50-day average resides near 1.82%.

The volatility index is +4% higher today to a still low overall level of 13.15.

Trading comment: Market commentators continue to call for a market correction, but they have been calling for one all the way up.  It continues to make more sense to take advantage of stocks and ETFs breaking out to new highs or showing good relative strength.  If a correction comes, it will be an opportunity to put more cash to work in a quicker fashion, or to shift some allocations out of fixed income into equities.  But sitting on the sidelines waiting for the "correction" has been a bit more costly this time around, at least in terms of opportunity costs.

Japan Surges Near 5-year Highs

Our markets are mixed in early trading with the Nasdaq pulling back after leading yesterday.  There is no economic data of note today but we do have another wave of earnings reports.

Asian markets were mostly higher overnight led by Japan.  Japan's markets had been closed for 2 days but surged upon reopening 3.6% above the 14,000 level for the first time since June 2008.  Also, the Reserve Bank of Australia surprised markets with a 25 basis point rate cut to 2.75%.

European indexes are also higher today.  German factory orders rose 2.2%.  Swiss unemployment held steady at 3.1%.  And EC commissioner Olli Rehn said its too soon to determine if Slovenia needs a bailout.

Among stocks moving after reporting earnings:

Stocks rising on earnings: FOSL, HCN, DTV, DFT, STE, MELI, NSM

Stocks falling on earnings: MR, PRGO, TAP, TDG, DISCA, FSLR

The dollar is roughly flat today but commodities are broadly lower.  Gold is down $20 to $1447.  Oil prices are weaker near $95.44.  Silver and copper prices are also weaker.

The 10-year yield is slightly higher to 1.78%.  And the VIX is only up a touch and still at very low absolute levels at 12.75.

Trading comment: This market is really relentless.  It does seem like in the short-term we are due for a bit of a pause, but other than that there are still no signs pointing to any change in character for the market.  Obviously the market can't continue like this indefinitely, but the question is what levels do we climb to before we get any correction of substance.  Certainly not worth sitting on the sidelines while so many stocks continue to perform well.  We are taking a closer look at DVA, which is an example of a stock that reported good earnings but has pulled back since.

Monday Morning Musings

The market is slightly higher in early trading following Friday's big rally.  There is no notable economic data out today and overseas action was mixed. 

Overseas market action was mixed.  Asian markets were mostly higher overnight.  Hong Kong and China both gained over 1%.  China's HSBC Services PMI declined to 51.1 from 54.3. 

In Europe most markets are lower despite some improvement in the services PMI readings.  German, France, and Italy all reported services PMI readings higher than the previous month.  The overall Eurozone services PMI rose to 47.0 from 46.6.  But it still needs to get above 50 to move back into an expansionary reading (not contraction).

Among the sector ETFs, financials are leading the early action while normally defensive utilities are down the most so far. 

The Nasdaq is up a little more than the S&P 500, led by AAPL which has been acting better since reporting earnings.  Growth stocks are starting to lead the market again.  Google is breaking out to new highs, and 3D printing stocks like DDD are recovering nicely.

The dollar is higher today and commodities are mixed.  Oil prices are a bit lower near $95.35.  Gold prices are up a tad around $1467.  But silver prices are lower as are copper.

The 10-year yield is roughly flat at 1.75%. And the volatility index is 2% higher but still at a very low absolute level of 13.12.

Trading comment: With all of the major indices at new highs it's hard to fight this market.  We still expect to see some rotation from the defensive dividend type stocks that led most of the year so far into more traditional growth stocks that have lagged.  Our strategy hasn't changed there.  In terms of asset allocation we have been looking for spots to add to overall equity exposure but the good buying opportunities have been few and far between.  Not sure how long it can last in that fashion, but in the near-term it sure feels like more of the same.

KAM Advisors has long positions in AAPL, DDD, GOOG

Sell in May?

I got in late this morning as I was on kids duty, so I didn't post my usual market notes.  But here is an article I just posted on Wall St. All-Starts about a hotly debated topic right now--

http://wallstreetallstars.com/my-2-cents-on-sell-in-may/

Stocks Retreat On Light Economic Data

The market is under selling pressure in early trading after a weaker than expected jobs report and some additional economic data that came in weaker than expected.

The April ADP Employment report showed the private sector added 119,000 jobs in April, but this was below expectations for 155,000 jobs.  Additionally, construction spending declined -1.7% in March which was well below consensus.

The other concern was China's manufacturing PMI data which eased to 50.6 from 50.9 previously.  It is still barely above the 50 level that marks the difference between expansion and contraction in the industry, but it highlights concerns over a slowdown there.

Another odd market indicator is the action in copper.  The copper etf (JJC) is near 3-year lows today.  Considering the forecasts for a pickup in 2H global economic activity, you sure wouldn't sense it from the action in copper (which is supposed to be very economically sensitive).

Most Asian markets as well as markets in Europe were closed for their Labor Day holiday.

The 10-year yield is falling further on the weak economic data.  The yield is all the way back to 1.63%, near its December lows.  For the last year or so the 10-year has basically traded in this 1.50% - 2.00% range.  We think its likely the lower end of this range holds and the 10-year works its way higher.

The volatility index is 6% higher today to 14.30, but still below the 15 level we have been using as a key level to watch.

Trading comment: This is day 1 of a mild pullback so far.  Odds favor more of the same action, despite the crowd who cites the 'Sell in May and Go Away' axiom.  The market ramped up pretty rapidly from its recent test of the 50-day average to put it in position for new highs.  But its likely we could see some sideways consolidation first as the markets internal energy gets rebuilt for a solid move above the SPX 1600 level.