Monday, February 03, 2014

Monday Morning Musings

Markets are moving sharply lower this morning, mostly on the heels of a much weaker than expected ISM report.  Futures were looking flat to slightly higher this morning before this economic data was released.

The January ISM Manuf. index fell to 51.3 from 56.5 last month.  That's a big drop and the new orders component was particularly weak.  It's hard to tell if there was any effect from things like weather, the end of the govt shutdown last year, etc.  But for a stock market in correction, this was more news to sell on vs. buy.

Treasury yields are also moving lower on the news.  The 10-year yield is falling further to 2.61%.  That's the lowest level since last November. 

Volatility is also on the rise.  The volatility index spiked to the 20 level this morning, up over 8%.  The 20 level on the VIX was a level that was only touched twice in 2013.  So the fact that we have hit it this early in 2014 likely plays into our thesis that this year will likely see far more volatility than last year.

Asian markets were lower overnight.  China and Hong Kong were closed for the Lunar New Year.  But Japan was down another -2.0%.  China's official PMI reading slipped to 50.5 from 51.0.  This wasn't a surprise as it pretty much matches the HSBC data previously released.  The services PMI fell to 53.4 from 54.6, which marks an 11-month low. 

Europe's markets are also lower today.  The Eurozone PMI rose to 54.0 from  53.9.  France rose to 49.3 and is getting closer to moving back into the expansion zone.  Separately, Germany's Der Speigel is reporting that Germany's finance minister is working on a third aid package to Greece, to the tune of 10-20 billion euros.

Trading comment: While most people find this latest pullback unnerving, remember that the markets were highly overdue for such a pullback.  Markets basically stair-stepped straight up in 2013 with very few pullbacks.  And especially since the October low.  The incessant rise in stocks also caused investor sentiment to grow overly complacent, something we have been commenting on.  So this pullback is normal and should be expected within the confines of normal stock market action.  At some point investor sentiment will grow more bearish and that will actually help stocks bottom and form new bases from which to launch another rally.  But right now is the time to be patient.


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