SUMMARY:
- Good news fails to provide catalyst as market still views Fed as the key problem.
- Solid April retail sales versus WMT earnings miss and lowered guidance.
- Dollar returns to 2005 high, oil breaking lower, gold tanking.
- Indices once more at a fish or cut bait point w/SP500 starting to smell like bait.
- Dell earnings fueling some interest in a relatively better looking NASDAQ, but earnings have not done the trick this season.
Plethora of current positives cannot take market's eye off the Fed and potential future negatives.
Strong retail sales, oil below $49 and another strong bond auction were clear positives for the economy, but from the start the market was unimpressed. Stocks started soft and managed a modest positive bounce, but they never showed any strength. WMT was blamed for the lackluster performance as it missed earnings, guided lower for Q2, and said making the target for the year would be 'difficult.' That was a red herring; TGT sales and earnings were fine. Retail sales were strong.
By the close stocks were just off their lows, falling on rising volume. NASDAQ volume was not so bad, but NYSE trade jumped to near average as the NYSE indices thudded down to the 200 day SMA. SP500 fell through the neckline of the head and shoulders again, a disappointing move, particularly with the volume. The mid- and small caps took the worst beating (-1.4%, -1.3%) though SP500 posted a 1% loss as it dumped lower. NASDAQ remains in its range and in decent shape, but SP500 is struggling. All of this despite good economic news.
I have said it many times before, and today just underscored the point: the market does not look at what just happened or even what is happening now. It looks down the road at least six months and closer to 9 to 12 months. Okay you say, but oil prices were down and that impacts stocks down the road. Oil was down but not nearly enough to make a big dent. Even if it was down to $40, however, one would wonder if that would help.
Why? Because if oil was at $40, the Fed would have even one more thing less to worry about, or better put, to hold it back, in raising interest rates. Oil gives the Fed pause because everyone remembers, even the current FOMC members, the 1970's when the Fed raised rates in the midst of an oil spike. If oil continues to fall the Fed will be even more emboldened in getting the Fed Funds rate up to 4% or more.
And that, gentle readers, is the key to the market right now. The soft patch was short and not that soft. That emboldens the Fed. The jobs report was much stronger than expected. The Fed nods knowingly. Retail sales were strong in April and March was revised higher. The Fed feels the power. Each speech from the Fed governors has yet to change even during the soft patch. The Fed Futures contract indicated 2 more rate hikes in the next three meetings. Now it is up to 3. That would but the Fed Funds rate at 3.75%. Barring a dive lower during those hikes (and we mean dive off the cliff), the Fed is likely to keep on hiking into 4% or 4.5%, and with bonds still in the 'conundrum' stage, that means an inverted yield curve and recession.
All too often in the past the Fed has kept on hiking even as the economy was showing obvious signs of slowing. It gets a target in mind and it will get there. Then it won't change direction until it is painfully obvious. That is what happened in the last collapse the Fed engineered. It hiked well into the decline and added its strongest hike right at the end. Then it waited much too long to cut (of course it should never have raised so that opens ups a real mind bender); it was so convinced it was right in hiking that it was late realizing the folly of its ways. By the time it cut rates GDP was already well into that cliff dive into recession. Of course to the Fed it had not hit bottom yet so everything was fine.
The Fed is playing its game book to the letter right now. It got started on cuts and cut too much. It waited too long to hike. Now that it is hiking it will hike too long because it does not want to be collared with causing inflation and because it had rates too low and needs to get them up to a level from where it can cut them again. At the same time it is draining the money supply pool so that even if someone wanted the money at these higher rates, getting it is another matter altogether. That is the way it plays the game just as it did in 2000. We discussed this last year and again at the turn of the year as we noted the Fed was one of the main enemies of the market in 2005: the Fed starts out talking a good game, but then it gets blinders on, trapped in its emotions, its cute 'Fed-speak' language, and its targets. It gets enamored with its own prowess and goes too far. If anyone believes the Fed is really looking dispassionately at the data each month they also believe Mark McGuire and Barry Bonds did not use performance enhancing substances. The Fed is made up of humans; just as the market it gets caught up in its emotions and makes the same mistakes again and again. It has an 80% strikeout rate in its last 10 rate hiking campaigns: in 8 of the 10 we had a recession.
When you look at the stock market you see it struggling even with good earnings, good profits, solid economic data, and favorable tax and regulatory policies. Still the stock market is keeping the recent rebound alive, but it needs help. We are supposedly in an inflationary environment and the Fed is pushing up rates to fight that inflation, but bonds are not acting that way. Bonds are rallying and the yields are falling as Greenspan ponders a 'conundrum.' Gold is in a nasty downtrend, dropping $6 Thursday. Gold rises when there is inflation. All of this is not just one, two, five, ten or even one hundred analysts saying the Fed is going to go too far (or already has). It is the synthesis of all investors, those positive, those negative, and those confused, and as a group they are starting to come together and say the future is not looking so bright with the Fed on the warpath once more. There is no conundrum. The bond market is the most reliable indicator out there and it is being quite clear: the Fed is going to hurt the economy. The stock market is giving it something of a lukewarm second, as it still tries to keep this rally going.
Indeed, despite Thursday stocks are hanging in there, still trying to put in another move higher before heading lower for another test. NASDAQ was lagging but now is trying to lead. That is not really a show of strength as much as a show of weakness by SP500, the index that was trying to lead the market off the April lows. Nonetheless there are leaders that are still holding up extremely well and still forging ahead. That provides some positive backdrop to the market's inability to rally on good news Thursday, but there are a lot of headwinds and near resistance to cross, and the distribution on the NYSE indices is starting to take its toll on this bounce.
With the Fed in a hiking mode the market is more limited to the trading range action we saw in 2004. It only broke out at the end of the year because the view switched to one where the Fed was close to being done and oil looked ready to break down. Neither happened, however, and the market sold at the first of the year, and is still trying to work its way out of the hole. |
