Is The Economy Bouncing Back?

Markets are mixed to lower in early trading.  There were some conflicting economic reports this morning that might leave some investors wondering if the economy is really bouncing back as much as economists predicted following the 1% contraction posted in Q1.

Personal consumption for April fell -0.1%.  With consumer spending making up two-thirds of GDP, this is not the type of data we were hoping to see.  Where is the pent-up demand from the terrible winter weather?  Hopefully May shows a true thaw.

The Chicago PMI, by contrast, showed a big improvement in May jumping to 65.5 from 63.0.  That is the highest reading since 2011 and a pretty strong level.  Consumer sentiment also remains high with the May reading staying at 81.9.

So we have some mixed signals in terms of economic data.  That said, most still expect at least a mild bounce back from Q1, with GDP growth getting back in the 2% range next quarter.  Q1 of next year could look pretty strong when compared to the year-over-year comparison of -1.0% just printed for Q1 2014.

Asian markets were mostly lower.  Japan's industrial production dropped -2.5%.  Europe's markets are mixed.  German retail sales fell -0.9%.  The ECB made additional comments that the central bank is ready to act and deploy 'non-standard' tools to combat the continued threat of low inflation.

 The 10-year yield is bouncing slightly from low levels to 2.47%.  And the volatility index remains very low at 11.48.  A spike in the VIX seems likely at some point, but timing is the key.

Gold prices are lower again to $1246, and oil prices are pulling back to $102.70.

Trading comments: No recent changes to our outlook.  The new highs in the market keeps us incrementally more bullish and we remain in 'buy the dip' mode into the early summer.  Rest up and have a good weekend.  A new month starts on Monday.

How Low Can Yields Go?

Stocks are trading slightly lower in early trading following the S&P 500 making new highs yesterday.  So far the selling action is pretty mild, and if the bears aren't able to push the market lower we could see some rally attempts into the close as the bulls regain the upper hand.

One surprising move today is the drop in bond yields.  The 10-year yield is lower by 7 basis points to 2.44%.  This is close to a one-year low in yields, which remains surprising given that the economy is supposed to be improving and inflation picking up.

One explanation is that bond yields are moving lower around the globe.  In Europe, bond yields continue to fall as deflation remains a concern, the ECB hints at cutting rates, and economic growth remains sluggish. 

Another theory is that so many people are short bonds here betting on higher rates that each of these moves lower in yields causes pain on that short trade and results in waves of short covering on those wrong-way bond bets.  This is the theory put forth by Jeffrey Gundlach of DoubleLine, and so far this year he has been right.

The notion that the drop in bond yields means the economy is slowing flies in the face of another stock-based indicator, and that is the move to new highs in the transportation index.  The $TRAN is making more new highs today, and the strength there would lend itself to the notion that the economy continues to gain strength.  Go figure.

Asian markets were higher overnight.  The Chinese press is discussing rate cuts in the face of a slowdown in the housing market.  Europe's markets are modestly higher.  Germany's GDP held at 6.7% and Swiss GDP rose 2.0%.

Trading comment: While some have been looking to 'Sell in May' and await the summer correction, the market continues to hold up well.  If the S&P 500 can consolidate its move to new highs without quickly giving up the 1900 level it would be a good sign for the bulls.  Its hard to get overly bullish heading into the normally volatile summer months, but as Jeff Saut stated yesterday, we are in a bull market and in a bull market surprises often occur to the upside.  Well said.

Is The VIX Broken?

Markets are off to a strong start.  The S&P 500 is making a new high.  Financials are leading the early action, and Bank of America is leading the financials after it resubmitted its capital plan to the Fed for review.

There was some positive economic data today also.  The Case-Shiller home price index rose 12.4% in March.  And while this data is already a bit old it does show that the slowdown we thought hit the housing market in March may not have been as pronounced as we thought.  Separately, durable goods rose 0.8% in April.

The volatility index (VIX) is 3% higher this morning, but only to 11.70.  The low levels hit on Friday were seen once last March, but before that you have to go all the way back to 2007 to find levels this low.  The question is are we ushering in a new range for the VIX in the 10-15 range like we saw pre-2007?  Or is the low VIX today lulling investors into a sense of complacency before ushering in another volatile period in the markets?  Time will tell.  But as the VIX hit 21 just a few months ago, we are leaning toward the latter scenario.

Asian markets ended mixed overnight.  Europe's markets are mostly higher today.  ECB's Draghi gave a speech yesterday and hinted at the prospect of more easing next month.

Oil prices are down slightly near $104.15.  And gold prices are breaking down and falling to $1268 after failing to overtake the $1300 level last week. 

Trading comment: Hard to fade the strong price action.  The SPX is making new highs, the NDX is close to joining in, and the mid-cap index is back above its 50-day average.  People have complained about the lower number of stocks making new highs, and that is a valid argument.  But we still have to respect the health of this market.  Narrowing markets can still go on to make new highs for awhile before running out of steam.  And it remains to be seen if there will be a new leadership group stepping up to take over for social media stocks and biotech.

Chinese Data Still Points To Contraction

Our markets are higher again in early trading on some in-line housing data and possibly some perceived improvement in Chinese data.

In the US, April existing home sales hit a rate of 4.65 million units which was up from the previous month's rate of 4.59 million.  Also, leading indicators for April rose 0.4%.

Asian markets were higher overnight after China's HSBC PMI data rose to 49.7 from 48.1 last month.  Those figures were above consensus estimates and generated some enthusiasm.  But China's Shanghai Composite actually closed slightly lower after its initial rally.  Moreover, this reading is still below the 50 level that markets the delineation between expansion and contraction.  So don't pop the champagne bottles just yet.

Europe's markets are mixed to flat today.  Eurozone manuf PMI fell to 52.5 from 53.4.  And France's PMI fell back into contraction at 49.3 from 51.2 last month.

Oil prices continue to climb to $104.10 today.  And gold prices are also higher near $1298, but still unable to crack the $1300 level and stay there.

The 10-year yield is getting a little boost to 2.55%.  And the VIX is back to extremely low levels at 11.75.  Option traders would probably benefit from buying a little protection for the summer with volatility being this low. 

Trading comment: No real changes to recent commentary.  The Nasdaq and mid-cap indexes are trying to break above their respective 50-day averages.  That could embolden the bulls here for a bit and lead to new highs in the SPX as well.  But until we see new leadership emerge in the market we still want to proceed with cautious optimism as we head into the summer months when market corrections occur with greater frequency.

S&P 500 Holds Above 50-day Average

The market once again bent yesterday but did not break.  The S&P 500 Index came down and tested its 50-day average support but was able to close above it.  The Dow also closed below its 50-day average, although this morning it is trying to reverse that.  And the Nasdaq and mid-cap indexes are still below their respective 50-days also. 

We always prefer rallies that start off the day weak and build into the close.  So this morning rally, while nice, often leaves too much time for sellers to emerge and knock the market lower into the close.

At 2pm EST we will get the latest FOMC minutes.  So that could color the action into the close if there are any comments that grab traders' attention.

Retailers continue to see mixed results.  TIF beat earnings and the stock is nicely higher while PETM lowered guidance for the year and the stock is well lower.

Asian markets were mixed overnight.  The Bank of Japan said their economy continues to recover 'moderately'.  And Moody's lowered its outlook for Chinese property developers to 'Negative' due to the slowdown in home sales.

Europe's markets are also mixed.  The Bank of England members believe an interest rate hike is in order sooner rather than later.

Oil prices are higher again to $103.40.  Gas prices at the pump have been high also, which we will likely start hearing more about ahead of the summer driving season.  And gold is weaker to $1290. We have been noting gold's inability to get back above the psychological $1300 level, and see no reason to hold gold right now.

Trading comment: If you look at the average stock, or the junior indexes, you can see that most stocks have been in corrections since early March.  But with some of the big-cap stocks holding up the S&P 500 has basically been treading water around the 1880 level for nearly 12 weeks.  Usually a long period of consolidation like that will resolve itself to the upside once we finally see a breakout.  We don't want to rule out this possibility, but its also possible that the selling moves into those large-cap dividend names and they too eventually experience corrections.  So in the meantime we are proceeding with caution and not making any big bets.

Retailers Not Feeling The Warmth

The market is lower in early trading.  A handful of retail stocks reported earnings and are trading lower this morning.  See DKS, SPLS, URBN.  The retail etf (XRT) is down nearly 2% in early trading.

But its still early, and growth names on the Nasdaq are bucking the early weakness so far.

Stocks bounced yesterday, but volume levels were pathetic.  Volume on the NYSE ran at its second lowest pace of the year.  The only day with less volume was Jan. 3rd.  So it doesn't appear there was too much conviction behind yesterday's small rally.

Asian markets were higher overnight.  Singapore's GDP rose 4.9% year/year.  China said it would limit the number of IPOs in the second half of the year to 100.  Europe's markets trade mixed.

The 10-year yield is still hovering near low levels around 2.52%. 

Gold prices are still below the $1300 level near $1294 today.  And oil prices are down a bit to $102.30.

Trading comment: Recent price action has not done much to reveal the short-term direction of the market.  The S&P 500 still holds up well, but it could be folks shifting to dividend stocks for the time being until the selling finally reaches those stocks as well.  The Nasdaq and the mid-cap indexes continue to trade below their 50-day averages.  And recent breakouts in the market have not gained much traction.  All in all it feels like a time to err on the side of conservatism.  We would prefer more of a pullback in the broader market to offer a better buying opportunity.

Do Housing Starts Hint At Economic Thaw?

Stocks were higher in early trading but have since reversed back into negative territory.  It's still early so anything could happen by the close of trading.  Also, short sellers have been profitable this week so we could see some short covering into the close as traders take profits ahead of the weekend.

This morning's housing starts data showed that housings starts rose 13.2% in April to 1.072 million units.  This was much better than expected, and hints at the notion that housing started to bounce back from the poor weather earlier in the year.

But the enthusiasm over housing starts was short-lived this morning when the Univ. of Michigan consumer sentiment survey was released.  It showed that consumer sentiment fell to 81.8 in May from 84.1 the prior month.

Asian markets were mixed overnight.  Japan was lower by -1.4% but India rallied to new highs after elections in the country concluded.  Hong Kong's GDP came in below expectations (2.5%).  European markets are mostly lower today.

The 10-year yield has found support at the low levels of 2.50%.  While some would say the bond market is forecasting weak economic activity ahead, others would point to it being more of a supply and demand issue.  That makes the prospect of QE ending this year more interesting.

Oil prices are up a little near $101.85.  And gold prices couldn't stay above the 1300 level and are trading around $1294 today.

Trading comment: The failed breakout by the S&P 500 recently caught our attention.  It was also accompanied by the Nasdaq and mid-cap indexes breaking back below their 50-day averages.  This is not bullish price action and has us proceeding more cautiously at the moment.  It would not surprise us to see a deeper correction at some point this summer than we have seen in recent months.  As such, we are maintaining higher than average cash balances and putting excess cash to work in defensive areas such as alternative strategy mutual funds.

Bond Yields At New Lows

Stocks are off to a weaker start this morning, but not meaningfully so.  Some of this was just weakness from overseas markets this morning.

The more interesting action is what is taking place in the bond market.  Today's PPI report showed that core producer prices were up more than expected, rising 0.5% last month.  On a year basis the PPI is up the most in 2 years.  But that didn't put any upward pressure on bond yields whatsoever.

Weakness in other economic data in the US could be a culprit, as well as talk in other parts of the world that deflation is still a threat.  As such, continued demand for Treasuries has pushed yields on the 10-yr Note down to 2.55%.  These are the lowest yields investors have seen since October 2013.  We are still expecting strong growth in 2H14 and for rates to have a move higher.  Recall that last year rates moved lower into May but had a big spike thereafter.

Asian markets were mixed overnight.  Reports are out saying the Peoples Bank of China is making a push with lenders to increase mortgage lending in an effort to stem the slowdown in the real estate market.

Europe's markets are lower today.  Germany's Bundesbank president said he is not in favor of QE.  And the Bank of England said rate hikes are likely to begin around Q2 of 2015, which is later than most participants had expected due to recent economic strength in Britain.

Oil prices are higher to $102.35 and gold prices are back above $1300 to $1306. 

The VIX is back at very low levels near the 12.0 level.  Historically when volatility gets this low it has usually been a good time to buy some protection in the form of put options.

Trading comment: The S&P 500 made a new closing high yesterday, and the Nasdaq and mid-cap indexes are trying to stay above their 50-day averages and play catch-up.  Biotechs are higher today while the overall market is weaker, and that is a good sign.  It still looks like the correction has run its course for the time being.  Seasonally, the summer months are often a time when we see a correction in the market.  But there could be a window where the market continues to push into new high ground first.

Where Is The Pent-Up Consumer Demand?

Markets are moving higher in early trading with the S&P 500 making a new high for the year.  More growth stocks are bouncing from their recent selloffs, but small-caps continue to lag today.

In economic news, retail sales for April increased only 0.1%.  And if you take out transportation (autos were +0.6%), retail sales were flat.  This was well below expectations and doesn't bode all that well for a big snap-back in Q2 GDP.

Economists were predicting that pent-up demand that had been created by the extreme weather conditions earlier this year would be unleashed in Q2 and we would see a sizable snap-back.  So far that has not come to fruition.  Hopefully May will show stronger figures.

Asian markets were mixed overnight.  Chinese retail sales rose 11.9%, but this was below expectations.  Industrial production was also a touch light at 8.7%.

European markets are also mixed.  Eurozone economic sentiment fell to 55.2 from 61.2.  But Germany saw a bigger decline in economic sentiment to 33.1 from 43.2.

Oil prices are higher over the $101 price level while gold prices could not remain above $1300 and have eased back to $1295.

The 10-year yield reached 2.66% yesterday but has fallen back today on weak retail sales and is currently near 2.61%.

Trading comment: The Nasdaq had a solid day yesterday, pushing the index back above its 50-day average.  Ditto the S&P midcap index.  With the SPX hitting new highs, the market appears to be back in rally mode and the junior indexes should play catchup to the Dow and SPX.  That said, we are sticking with the solid names that are breaking out to new highs or close, rather than trying to pick fallen angels in hopes that they will rebound.  We prefer to focus on the new leadership in the market which likely won't be the same stocks from the last phase.

Monday Morning Musings

Markets are off to a strong start.  The Dow Jones has made a new high for the year and the SPX isn't far off.  The SPX would need to clear 1897 for a new high (today it hit 1893).

There hasn't been much in the way of market moving news overnight, so this is mostly buyers stepping in after a multi-week correction.  There was an M&A deal this morning with Hillshire Branks (HSH) agreeing to by Pinnacle Foods (PF) for an 18% premium to Friday's close.

Overnight, Asian markets ended mixed.  China bounced 2.1% on reports suggesting that they may relax restrictions on foreign investment into Chinese companies.

European markets are higher today as the news out of Ukraine has not escalated to the point of worrying global investors. 

Oil prices are still hovering above $100 and gold prices are higher today and struggling to get back above the $1300 level.

The 10-year yield is getting a little bounce to 2.65%.  And the volatility index is back down near mutli-month lows at 12.35.  The last time we saw the VIX at these low levels it bounced around there for a couple weeks and then saw a sizeable spike higher.  Would not be surprised to see a repeat.

Trading comment: This morning in our trading accounts we are playing some short-term bounce candidates like FEYE, ZU, etc.  These stocks have been absolutely crushed in recent weeks and seem ripe for at least a nice bounce.  Bigger picture, we said last week we would not be surprised to see the market make another push higher into early summer.  We are looking for new leadership areas in the market and adding to those areas when looking to put cash to work. 

KAM Advisors has long positions in FEYE, ZU

No Change From ECB, But Draghi Says Bank Is Ready To Act

Stocks are bouncing back from some of the weakness seen over the last few days, although looking at a chart of just the S&P 500 doesn't really highlight any weakness.  The rotation out of high growth names but into more value-oriented stocks has kept the SPX near its recent highs while taking other indexes like the Nasdaq and Russell 2000 down below their 50-day averages.

The ECB held its latest policy meeting and opted to keep rates unchanged at 0.25%.  ECB President Draghi did not announce any other policy moves but said the bank stands ready to act in June 'if needed'.  The Bank of England also kept its policy stance unchanged.

Overnight Asian markets ended higher.  Chinese trade data came in better than expected with both exports and imports posting positive year/year growth vs. expectations for declines.  Australia's unemployment rate held steady at 5.8%.

The 10-year yield is trying to bounce from that 2.60% level, but not having much success.  It still seems odd that the 10-year can't move higher if the market still expects economic growth to pickup in the second half of the year.

Oil prices are slightly lower near the $100 level, while gold prices are up a touch to $1290.

The volatility index remains at low overall levels around 13.25.  The recent selloff in momentum stocks hasn't really pushed volatility expectations higher.

Trading comment: Historically market selloffs would start with the high growth names but eventually the selling would get around to the value stocks also.  And that would mark the beginning of the end of most garden variety corrections.  But in a world with QE from the Fed, things seem to work differently.  That makes it difficult this time around to tell if the correction will be solely concentrated in the growth stock names, or if it will eventually spill over into the value stocks.  The way that the SPX has held up lately has us leaning to the possibility of new highs in the SPX as we head into early summer.  So we are looking for new areas of leadership.

Getting More Constructive

The market is higher again today, and for the first time in recent memory the Nasdaq and growth stocks are leading the action.  Of course, most of them got very oversold so a bounce is expected.  The key will be to see if there is some follow through and if they can start making some higher lows.

In economic news, the ISM Index for April rose to 54.9 from 53.7.  Separately, personal incomes rose 0.5% and personal spending rose 0.9% for March.  These are solid figures and increase the odds that GDP will bounce back in Q2. 

But you sure wouldn't know it by looking at the yield on the 10-yr Treasury today.  It is down another 3 bps to 2.61%.  That's about the low of the range for the last few months, but it needs to hold again. 

Most foreign markets were closed for Labor Day, including Hong Kong, China, France, Germany, etc.  Japan was open and bounced 1.3%.  An aide to the prime minister said more easing will be in order if the impact of the recent sales tax hike continues to weigh on economic growth.

Trading comment: We continue to get incrementally more constructive on the markets recent action.  The correction is fairly long in the tooth by recent years standards and the market lately has not made new lows.  The correction was mainly in high beta growth stocks and that may be over.  The Nasdaq and mid-cap indexes are close to breaking back above their respective 50-day averages.  And the Dow and S&P 500 are pretty close to new highs.  As such, we are looking for stocks that held up the best during the recent correction and are poised to make new highs.  Those stocks usually provide good leadership in any ensuing rally.