The Tale of the Tape
The Dow made an impressive push over its 11,000 level on strong volume
lending faith to the move this week. Where’s that Dow 7,500 that bears
were screaming about? Just more proof that mania predictions like Nasdaq
6,000 on the upside has the contrary negativity on the downside.
Unfortunately, the Nasdaq couldn’t penetrate the 2,230 distribution level
on the excitement of the Fed cut this week. This still shows that the
Nasdaq has some more of our healing process to go through from the
meltdown over the past 12 to 15 months.
I believe this last 50 bps cut by the Fed should be the last of the
aggressive easing cycle. We should see another 25 bps at the next meeting
in June and then look to sit tight with a possible 25 bps beyond that. I
wouldn’t expect to see anything more that that as we sit back and see how
well the liquidity injected into the economy over the past months does.
The problem that will arise towards Q4 of this year and Q1 of next year
will be inflationary and therefore a supporting argument for why I believe
our aggressive easing policy is finished for now.
The current environment supports our idea that the worst is behind us as
clearly discounted by the market behavior. I would expect to see Q3 GDP
figures come in with a negative reading and be the worst of this economic
turmoil. The trade deficit figures widened again after last months
surprise narrowing contributing to an inflated 2% GDP. Our energy shock
will continue through the summer. Employment figures, while I feel have
topped at negativity (my 4.5% expectations are here and I consider to be
near the top) will continue to weigh on consumer confidence. Given this,
consumer spending I am looking for to take a rest as I feel that current
spending is at an unsustainable rate. We had pent up retail sales that
exploded due to weather giving a somewhat distorted view of this sector.
Summing it up, we have employment figures continuing to be weak with our
initial claims still over 400K. Consumer confidence is still in a larger
picture downtrend, net worth took a major hit, debt levels still at record
highs and there is still a negative savings rate. With energy shocks
continuing through this summer, our consumer spending habits will take a
check. This is where I feel that if any quarter is going to show a
negative GDP, it will be Q3 of this year. But I don’t expect it to be a
two quarter negative reading. Q4 should show a bottoming and then the
recovery to be more likely in Q1 and Q2 for “real” stability. This is
where inflation concerns will begin to show more or not and keep the Fed
either inactive or hopefully just a gradual tightening to keep us on the
right bullish path.
What is helping now is a few positives. Fed easing on monetary policy,
tax cuts, stability in consumer confidence and spending (although we don’t
have signs of explosive upside in this current downtrend), money growth is
starting to reaccelerate, bonds moved lower, spreads have narrowed and
commodities such as lumber and gold have risen. The small caps are doing
well creeping back over resistance levels, the S&P 500 broke that 1,260
resistance, the Dow broke 11,000. The last piece of the puzzle (and a
piece I don’t think will fit for a while still) is the continued
resurgence in the Nasdaq. Tech activity and capex spending, along with
inventories versus sales still has not shown enough for the market to
begin discounting visibility. The Nasdaq is going through a phase that I
term “discounting what they see, rather than what is too far out of their
range”.
This goes along that same theme that I’ve discussed in past articles about
the worst is behind us (leading to our current range of 2000 to 2200
area) but the best has yet to come (failure to break resistance levels).
They aren’t willing to shovel a pile of money into the sector just yet as
it seems that real stability is still too far out of our scope to be
aggressive here. We may see a few technical breakouts, but the euphoric
stage that finally everything is okay is far from here. As you can see,
being able to tie in economic indicators with tape reading principles in
the market will create more confidence in your longer term investment
trading plan. This is how the minority watches the market and profits
from crowd actions of the majority.
Be the minority!
Good Luck This Week. |
