Friday, July 26, 2013

Is Japan Hinting About Its Own 'Tapering'?

Markets are lower this morning, continuing this week's choppy correction that has been somewhat modest compared with past pullbacks from overbought levels.

Earnings reports continue to roll in.  A standout on the upside last night was Starbucks, which posted a surprising 9% increase in same-store sales.  On the downside is Expedia, which is down -25% today on disappointing earnings.

Stocks rising on earnings: SBUX, HMSY, DLR, SWK, SSD, DNB, ATVI

Stocks falling on earnings: SWI, EXPE, AMZN, CERN, WYNN, KKR, KLAC, DECK, DRC, LEG, TPX, BGG

In economic news, the Univ. of Mich. consumer sentiment survey was revised higher to 85.1 from 83.9 previously.

Asian markets were mixed overnight.  But Japan was sharply lower by 3%.  The Japanese finance minister suggested that inflation is picking up and nearing the Bank of Japan's target.  He implied that the country may soon be able to scale back on its asset purchases.  Markets didn't like this hint of 'tapering'.  Markets had come to expect this to be a multi-year experiment for the Bank of Japan. 

I think it is unlikely that they would taper so soon after reaching their target.  That would open too much of a risk for inflation to quickly decline again.  A more prudent approach would probably to allow inflation to rise above their target for a bit, as it is much easier for central banks of developed economies to tighten monetary policy and reign in inflation.

European markets are mixed after Greece received approval for its next tranche of bailout funds.

The dollar is a bit lower, but so are most commodities.  Oil prices are lower near $104.25 and gold prices are down a bit to $1327 so far.

The 10-year yield is lower today falling back to 2.57%.  And the volatility index is up 5% to 13.70 but still shy of the 15 level that we could see in the near-term.

Trading comment:  The selling in the market seems to be picking up.  Volume appears light so far and it is unlikely traders will make a big stand and step up to buy ahead of the weekend.  So bears might have a win for today.  But this action isn't all that surprising in light of the rally the market has enjoyed and the overbought condition we have been highlighting.  Patience will allow for the market to come in more, and then those stocks that had strong earnings reports can be bought on weakness.  Stocks still appear to be the favored asset class into the second half of the year.

KAM Advisors has long position in SBUX, CERN


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