THURSDAY:
Another look at the economy Thursday with the first Q1 GDP revision. Expectations are for a significant rise to 3.7% from the 3.1% originally reported. It could easily top that level and come in closer to 4%. That is old news, however, and not really market moving except for the fact that it further bolsters the Fed's position that it needs to hike rates.
Rate hikes. That is what everyone has talked about on the financial stations for the past several sessions. We don't have a problem per se with rate hikes as long as the Fed does not take the approach that it has to slow the economy in order to save it. In other words, if it keeps money supply at decent levels it can get rates to a more comfortable 'emergency fund' level without doing too much damage to the economy. Unfortunately, as we have discussed of late, the Fed doesn't view growth as necessarily benign. It equates growth with inevitable inflation via the Phillips Curve and as long as it does that, we will always face the 'hike too much then lower too much then hike too much' cycle. Yes the business cycles may indeed be smoother now, but it is not the Fed doing that but the great technology and financial flexibility businesses have today. Indeed it is the Fed that is the cause of most of the fluctuations we see as it tries to fine tune the economy. It cannot be done with interest rates; history proves that time and time again. Or maybe it could, but in the hands of human beings, emotion creeps in and history repeats itself time and time again.
For now the market appears to have come to grips with what the Fed is going to do, apparently taking the Fed Funds futures contract at its face, i.e. two more rate hikes with the outside chance of a third. It has to be looking at things that way; any more and the yield curve inverts, and historically that is very bad news for stocks.
Thus the market is proceeding with a nice rally and now what is shaping up, at least at the start, as a nice consolidation of that move. Healthy action where stocks pause, come back to near support on lower volume, reload, and then resume the move. Volume has not been stellar in terms of upside strength, but price/volume action has been positive, i.e. higher volume on up sessions and lower volume on lower sessions. That shows net accumulation of stocks, and that is what keeps driving prices higher.
For now we continue to be patient, letting stocks makes these pullbacks. We will see some leaders start to take off relatively soon; they are leaders so they tend to move ahead of the overall market. We want to pick them off as they come up off of their tests or out of their bases on rising volume; that shows the big money is stepping back in after the rest to buy more shares. That gives the move some staying power and that is when we make our buys. |
