Tuesday, June 11, 2013

Update ...

S&P 500 dipped around 1% on Tuesday as, very surprisingly, Japan paused central planning for a bit.  As we mentioned on 5/11, we believe the equity market is overvalued, partially due to the ever-present QE premium.  Of course, as is the case with any centrally managed/controlled economy and equity market, once those central planners see signs of economic weakness or not as much growth as desired, they begin to taper the talks of tapering.  Do not be surprised if this takes place sometime this week.  Who knows, Mr. Hilsenrath and Bernanke may be discussing variety of strategies each with behavioral impact on some institutional investors but certainly on 100% retail investors; or so they hope.  We still value the S&P 500 at around 1475.  We are not saying it will get there tomorrow or next month, but at some point, we think within the next 12 - 18 months, the reality of fundamentals will take over, no matter how many 'green shoots' or 'sugar highs' Bernanke throws at the market.

From a technical standpoint, at 1626.13, S&P 500 is not far away from going below its linear regression level of 1617.  Before getting there, it will have to break through and stay below the 'semi-support' level of 1625.  By the way, since we last discussed the MACD level being too high (5/22), it has dropped from 24.05 to 4.67 (as has S&P 500, from 1687 to 1626), but it remains below its average.  For this to reverse, we think MACD would have to start up-trending and cross above its average, which currently stands at 9.45.  One more thing on the technical side, the next level of the Fibonacci Retracement is around 1595, which if the market goes below, it can dip all the way to the 1540 - 1550 range.  But as is with technical analysis, everything can change very quickly.

Some potential market moving economic indicators being released later this week include the May retail sales, weekly initial jobless claims, May PPI and May industrial production.  

We think May retail sales may have been helped with slight uptick in gasoline prices during the second half of May.  Auto sales will likely be flat after the nice 1% pop last month.  So, while the headline figure might come in-line or better than the 0.5% m/m change consensus, we think retail sales, excluding autos and gasoline, could come in slightly below the 0.3% consensus.  

Initial jobless claims are pretty difficult to project, especially given the seasonal factors applied and BLS' consistency with its revisions.  Economists have projected a seasonally adjusted figure of 350K.  As usual, most of them are likely being 'uber conservative' with their estimates. 

We will post our industrial production and capacity utilization estimates by Thursday.

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