Friday, June 29, 2012

Sector Performanc​e Update for the Week of 6/25/2012 After Friday's Huge Jump!

Well, so much for us calling this week to be a volatile one, which it was; and to end pretty much flat, which it certainly did not.

After dipping more than 6.6% (at the YTD low close on 6/1), the S&P 500 is now down only 0.6% from when we suggested sector rotation for equity holdings into less cyclical sectors (before the open on 3/5).  We note that since early March, sectors that we suggested, consumer staples and utilities, have been the two best performing sectors of the S&P, up 5.2% and 5.8%, respectively.  However, we certainly did not foresee the 'solution' which the European leaders supposedly came up with last night.  That solution basically drove the market 2.5% higher today.

Of course, the only-modest Chicago PMI reading and the University of Michigan's disappointing consumer sentiment survey result were ignored.  April consumer spending was revised down, while there was no growth in the May reading (not very good news for Q2 GDP).  In addition, lack of movement in core PCE prices provide support for the view that the global economy is slowing down, or as we believe, has already slowed down.  Regarding non-core prices, although oil had a nice jump today, driven by the overall 'guarantee' of liquidity in the EZ and the upcoming start of the oil embargo on Iran, it has certainly backtracked from its $100+/barrel level, also indicating a slowdown.

As mentioned last week, although the 4th of July is during the upcoming week, we think trading volume, along with volatility, will be high this coming week, as the market expects some rate cutting in Europe along with various state of employment economic indicators such as the ADP report, the Challenger Job Cuts and BLS' NFP figures.  The week will get off to an exciting start as the manufacturing ISM index is to be released 25 minutes after the market opens.  Although the consensus is at 51.5, we think it will actually come in slightly below 50.0, around 49.0.  In terms of how such disappointment may impact the market, we are not sure given that the market is awaiting the June BLS employment report and it's expectation of a rate cut in Europe.  Regarding the employment report, we expect June NFP to come in around 70K - 80K.  We will likely narrow this range in a few days, but overall, we think the official figure will be disappointing.  What is interesting is that given the slightly better housing numbers and the market's latest jump into the stratosphere, the June employment report will have to be significantly worse than expected for the Fed and Bernanke to consider initiating a QE3 before the end of 2012.  We will likely see the market go down, reacting to any disappointing NFP figure.  However, the less disappointing that number is, the less likely a bounce back will be on Friday or the early part of the following week.

Economic indicators gave an overall mixed signal this week, with new and pending home sales, Case/Shiller home price index and overall May durable orders being the bright spots.  New and pending home sales for May were much higher than expected, but we note that most of the purchases are made by investors/institutional buyers.  The mom & pap homebuyers that previously drove market's expansion are not yet in the game; and the deteriorating state of employment along with lack of wage growth will likely keep them out of this so-called recovery for some time to come.  In addition, while overall durable goods orders came in above expectations, there was barely any growth in non-defense goods orders, which again provides support for lackluster GDP growth in Q2. 

Consumer confidence and initial claims were disappointing.  Initial claims were again revised up, strengthening that bad-news upward revision momentum we have seen since beginning of 2012.  Also, Q1 GDP came in at 1.9%, as we had expected.

From a technical standpoint, that 1340 resistance level that we mentioned was certainly overridden today.  However, the S&P 500 still remains below its linear regression trend line, which we view as the next resistance level, around 1374.  In addition, although it jumped nicely today, it will likely have to create a support above that 1340 level before we could say with confidence that it may be headed for 1374.  The 10-day and 50-day EMAs are getting closer to cross, but this time they are not both downward trending.  While the 10-day EMA has turned up, the 50-day is pretty much flat.  And 1310 remains the support level.

We note that beginning the week of 7/9, we will attempt to analyze and value specific public companies and make recommendations.  Of course, as those fancy professional analysts and their lawyers say, none of the projections and/or valuations is guaranteed to be accurate or correct.

Lastly, we were very very disappointed in seeing Germany lose.  The two goals were scored by Mario Balotelli, which surprisingly we found out that he is a Sicilian, raised in Palermo.  He certainly doesn't resemble a 'Super Mario', but given his talent, that's what they call him.  He was also given the nickname 'Bailoutelli' on Twitter, as many believe he defeated the German resistance on the soccer field.  Maybe he should be put in the same mix as Italy's Mario Monti.  Yesterday, both of those Mario's defeated Germany, each in his own way.  At least regarding Monti, we think Germany's Merkel will somehow fight back and make this more of a knock-down, drag-out fight.  Unfortunately, none of the German soccer players will have a second chance to take revenge on Balotelli as he and Italy will face Spain on Sunday at 2:45pm ET.  We’re not sure for whom to root given that we are not familiar with either soccer team.  We do know that both nations need bailouts.  Our non-soccer related reason to cheer on Italy:  After comparing the two countries’ 10-year yields, it appears that Italy is slightly safer to root for … so go Italy!

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