Excellent article on Street.Com
SAN FRANCISCO -- Here come the skeptics (one-two-three). It's no fantasy -- rock-n-roll, or otherwise -- for investors, but some market watchers are saying April looked a lot like January. The implication being that May and June will be a lot like February and March, which is bad company, indeed, for those long equities.
The very fact so many are worried about and watching for a repeat of the post-January experience suggests it's less likely to occur, as the stock market has a way of humbling as many participants as possible. Recall that most market players (and gurus) weren't terribly concerned that January's rally would prove to be such a sucker's bet.
Clearly, concerns about a post-January repeat failed to stem the rising tide today as the Dow Jones Industrial Average rose 1.5%, the S&P 500 gained 1.4% and the Nasdaq Composite rallied 2.5%.
But still, "every portfolio manager in the world that is running equity monies has to be wondering if this rally will succumb to what we saw in February and March," Brian Gilmartin, of Trinity Asset Management in Chicago, commented today in a note to clients.
Highlighting those repeat fears, Schaeffer's Investment Research in Cincinnati issued a report yesterday denoting the "eerie comparison" of the S&P 500's trading patterns in April and January. Todd Salamone, director of research at the firm, recalled the S&P 500 broke above its (then) 10-day moving average of around 1315 on Jan. 11, moved higher and then pulled back to its 10-day moving average on Jan. 26. (By then the 10-day average was near 1350.)
The index peaked on Jan. 31, at an intraday high around 1380, creating a double-top with its prior peak, hit seven weeks earlier on Dec. 11.
"We are now observing a strikingly similar pattern from the S&P 500 in the month of April," Salamone reported, noting the index moved above its 10-day moving average near 1140 on April 10, retreated and then retested its 10-day on April 24, which by then had moved to around 1210. "The crossover and retest [occurred] on nearly the same days of the month as January," he said.
Salamone also observed similarities between the final trading days of January and April: During both sessions, stocks started strongly, then faded. Furthermore, he noted the S&P 500 opened weak on Feb. 1, only to reverse and close higher -- much as was the case today. However, today's gain was much stronger on a percentage basis.
"The question now is whether the index will be able to clear its recent high, which was achieved seven weeks ago" at 1266.50, Salamone said. Yesterday, the S&P 500 traded as high as 1269.28 -- a little more than seven weeks after its March 8 peak. Today, the S&P closed at 1266.45, tantalizingly close to that March 8 intraday high and above the close of 1264.73.
The researcher conceded that it's debatable whether an intraday move is more important than a closing move (one foible of technical analysis).
Furthermore, Salamone stressed he's "not making a call" that the post-January experience will repeat itself. "It's an open-ended question," he said, but "I thought it was interesting the movement in the market was so similar."
As reported previously, Schaeffer on Feb. 27 adopted a long-term bearish view of the market, which the firm maintains. Before rendering judgment, note that the research shop has more recently made some short-term bullish calls -- for example, forecasting the Nasdaq could rise back near its January lows of around 2273.
Salamone said the observations about the S&P's January-April similarities were made to inform clients of the patterns, so they'll be better prepared to take defensive action, should additional similarities occur.
As mentioned above, I do not believe a post-January reprise is in the offing, and believe the hand-wringing makes it less likely. The rationale for repeating Schaeffer's view here is not to scare or spook, but to inform readers about the developments some sophisticated investors are monitoring.
Inflation, Revisited
It is in that same spirit I've recently discussed the possibility of inflation's revival, the very mention of which guarantees I'll be bombarded with vitriolic emails. Such was the case following Friday's piece.
First and foremost, I never said you're going to need a wheelbarrow full of money to buy a loaf of bread. Second, I never said inflation is going to spoil the burgeoning strength in equities, and I did say inflation is preferable to the deflation alternative (and Alan Greenspan appears to agree).
I have said (repeatedly) that inflation could be a problem later this year and might compel the Federal Reserve to consider tightening monetary policy sooner than most investors contemplate.
There was nothing inflationary about today's National Association of Purchasing Management's survey for April, as the prices-paid index fell to 48.9% from 49.9%. Overall, NAPM rose to 43.2 in April from 43.1 in March, still below levels indicating expansion in the manufacturing sector but a third straight monthly rise. A belief that the manufacturing sector remains weak but inflation threats won't restrain the Fed from easing later this month spurred the bond market's rally today. The benchmark 10-year Treasury bond rose 11/32 to 97 26/32, its yield falling to 5.29%.
Still, it's a mistake to dismiss the inflation trend, particularly given the steepening of the Treasury bond yield curve this year. Notably, some economists who've focused on the threat of economic weakness are taking notice.
"We have been anticipating 5% long-bond yields for some time, based on the assumption the economy will land in recession," Kathleen Camilli, director of economic research at Tucker Anthony, wrote in her weekly commentary Friday. "However, with more than enough economic data confirming a deceleration in economic growth, the long end of the curve has so far failed to respond positively, and instead seems to be worried about a heating up of the economy, and inflation."
Camilli remains dubious, and predicts first-quarter GDP will eventually be revised from a 2% rise to somewhere "close to our original estimate of down 0.5%," with second-quarter GDP of about negative 1.5%.
But "we are extremely respectful of the markets themselves, and watching carefully for what they may be telling us about the future," she wrote. "In this case, the bond market seems to be concerned about inflation. We don't quite know why [but] there is clearly a reason to pause, until we understand further why long yields are moving higher."
Another reason for inflation doves to pause is the fact gold stocks (admittedly a controversial inflation indicator) have been moving higher. After rising 2.9% today, the Philadelphia Stock Exchange Gold & Silver Index is up 22.7% since its April 2 lows and 10.3% year to date. |
