Dr. Pangloss Is In the House: Everythings Right With a Perfect Market ?
Reading the pointers for the last couple of Weekly Reader's Market sections one would have the impression that the cauldron continues to bubble in terms of the credit crunch coming under control but still being a problem, not all of those visible as yet and increasing risks to the dollar, inflation, etc. in Economy section. Looking at the charts of the market clearly the data doesn't know what it's talking about or Mr. Market is a lot smarter then me and them - the data that is. Quite possible indeed, especialy in the first case. As Keynes said...never mind everybody's used it by now but you take the point.
The accompany chart uses the NYSE as the benchmark instead of the SP500 but they laregly
cohere over the last several years and capture the wide range of bigger cap stocks. We're also trying a new graphic technique - rather than having multiple charts or multiple data loaded onto one we're going to present a master chart which is build up of several sub-charts (the magic of cut & paste - bless you PARC). Hopefullly this has the advantage of making everything visible at once and reducing the number of popups at the price of making it a big one.
If you look at the NYSE after the Jul-Aug drop (which we and others have pointed out are miniscule and don't represent anything like a correction) the market spent an equal amount of time climbing back to a consolidation range between the 50 - and 200-day MA's. Which it has now busted nicely to the upside though it appears to be enterring a new, and lower, trading range. In the short-term it's pretty open-ended whether it goes up, trades sideways or bounces back down. As long as the economic, credit and currency issues continue to be ignored and earnings turn out decently the chances of an uptick are decent I suspect. Despite my obvious personal wishes which reflect my bets :) ! Ouch, indeed. Clearly though the uncertainty and volatility factors have gone and will go up. Now might not be a good time to put new money to use unless it's for either the very long-term (pending a lot more clarity on long-term economic prospects) or a much shorter-term trading against the trading range and possible uptick.
Update: this morning's "Ahead of the Tape" had some fascinating comments pretty much in line with our observations and concerns:
Stock Strength Seems to Belie RealityRemember all the trouble stocks ran into over the summer? Neither does Wall Street. The Dow Jones Industrial Average advanced 75.44 points last week to 13895.63, putting it 1,050 points above its August low and not far from the all-time high of 14000.41 it tagged in July. The stock market is often seen as a leading indicator of economic growth. But there seems to be a disconnect here, because the economic outlook sure doesn't seem bright. Last week's report that sales of new homes fell to their slowest pace in seven years in August was just another sign of the headwinds facing the economy. The latest monthly reports on jobs, retail sales, industrial production, manufacturing activity, durable-goods orders, housing starts and consumer confidence have all been weaker than expected. In a radio interview last week, former Federal Reserve Chairman Alan Greenspan said "the danger of recession has obviously risen." He put the odds at less than 50/50. Former Treasury Secretary Lawrence Summers said in a television interview that the odds weren't quite 50/50 but were "somewhere in that neighborhood." The raft of weak economic reports may be a sign that the housing downturn has begun to spill over into other areas.
So, facing up to realities as Mr. Market presents it, what else can we see ? The sub-charts show 3-month performance for foreign markets and SP sectors along with a 2 year chart of the Euro vs $. As you can see we've been in a steady downtrend for a while - which greatly benefits foreign investments by us but makes foreigners less inclined to invest here or loan us money. Notice also that there's been a sharpish downtick recently which unfortunately, but possibly, is a tipping point. And with Fed rates lower as well as continuing deficits the dangers for the $ increase, which also threatens to increase inflationary pressures and, perversely as foreign funds migrate elsewhere, lead to rising long-term rate pressures.
Meanwhile foreign markets continue to have exaggerated reactions that have been their normal patterns while the different sectors reflect their newly emerging patterns. Specifically Emerging Markets (EEM) and Asia-Pacific (read China) (EPP) did spectacularly well though Europe (IEV) and Technology didn't do badly at all. Taking a harder look at the sectors we split them into two performance groups. Staples (XLP) isn't doing badly recently which is not true YTD but Discretionary (XLY) and Finance (XLF) continue to seriously underperform while Healthcare (XLV) appears to have found a little strength).
On the other hand the stronger sectors continue to out-perform the broader market with Energy (XLE) doing quite well as we'd expect while Industrials (XLI) and Technology (XLK) continue to show some strength. Telecom (IYA), interestingly, is weakening after a very nice run and Utilities (XLU)continues to be a relatively weak performer as well.
Not only are these the patterns that began emerging earlier in the year but none of them are surprising with conintued increases in Oil prices likely as well as continued demand for large-cap industrials with signifiant exposure abroad explaining XLE and XLI. The continuing strength in Technology needs some more careful thought.Clearly a lot of momentum expectation has built up yet with the economy slowing and decreased demand for capex as a result one has to wonder what's sustaining the overall performance. Certainly key Tech bellweathers (APPL, GOOG, CSCO, et.al.) have had strong results but those strike us as company and not sector stories.
Interesting times indeed. Continued strength and exaggerated volaility in Emerging Markets, Energy, Industrials and Techology with only Energy based on truly favorable longer-term trends and Technology at increasing, but ignored, risks of capex pressures.