Thursday, June 20, 2013

Is good news bad news or is it good news?!

Good news remains bad news for the equity market.  The Philadelphia Fed survey and existing home sales came in above expectations, but the market said 'no thanks' and continued to decline.  S&P 500 is down another 1.4%.

What we consider as the most reliable regional manufacturing survey, the Philadelphia Fed survey, came in above expectations.  The index for June was at 12.5, up from -5.2 in May, and higher than the Street's -1.0 estimate.  Some important sub-indexes showed improvement.  They include new orders (16.6 vs -7.9) and shipments (4.1 vs -8.5).  The decline in inventories, to -6.6 from 4.1, might be a good sign in the short term.  It could also be partially responsible for the improvement in new orders.  Employees sub-index still showed continuing decline, although at a slower pace.  It improved to -5.4 from -8.7 in May.  Given the average workweek sub-index's move into positive territory (0.8 from -12.4), we could see more slight improvement in employment next month. 

Existing home sales for May came in at an annual rate of 5.18MM, above the 5.00MM consensus and higher than April's 4.97MM rate.  More than 85% of sales in May were of homes priced at $500K or lower.  However, in terms of the Y/Y sales growth, homes priced above $500K were the strongest.  Months supply was pretty much unchanged at 5.0.  We note that the 30-year fixed mortgage rate has increased to over 4.00% from around 3.75% about a month ago.  For this reason, June existing home sales figures (to be released in July) may not turn out to be this impressive.  

We have stated this on twitter and also in previous posts - as the economy shows improvement (although not at an impressive rate), QE tapering or natural increase in rates will begin to discount the QE premium that has been priced into the equity market for some time; and this could get the market closer to a valuation based on fundamentals.  Bernanke is in a tough spot.  Based on projections released by the FOMC (which we discussed in our previous post), the federal funds rate could move up to between 2% and 3% in 2015.  The current decline in the equity market could be a sign that it is trying to price in expectations of higher rates.  

S&P 500 has left the linear regression level far behind.  It is now also below its both downward sloping 50-day and 10-day EMAs.  It has also gone below the 1610 support level we mentioned in our last post and is approaching the next Fibonacci retracement level which still stands at 1595.  If the market closes this low today, we could see a dead-cat bounce on Friday or next week.  After all, a two-day 3% decline in the stock market is considered significant, especially with the QE policies still in effect.

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