What Could Explain Today?

Interesting that after we saw S&P 500 shoot up 2.8% on Monday, on very light volume, we did not see at least a small sell off today.

Let's see if any of the economic indicators could explain this.

Personal income came in below expectations, while spending exceeded estimates. Initially, some might think that higher spending is positive. We disagree, especially when you combine the higher spending with lower income and higher credit during a period of slow economic growth, weak labor market and rising core CPI and PCE index. We must mention that those economic numbers were for the month of July.

Let's look at June pending home sales figures. They came in at -1.3%, 10bps (or 1/10 of one percent) better than expected. This may indicate that a seasonally adjusted rebound in the housing market for 2H '11 is off to a pretty slow start. Although this was for June, it is somewhat of a forward indicator.

The June Case/Shiller home price index (20 cities) was 4.52% lower than last year. This was 18bps better than expected. Then again, May's numbers were revised lower by 8bps, so let's say 10bps better than expected. Overall, not much of a positive surprise. We do note that the report stated certain regions did show improvement; we actually pointed this out in one of our August 11 posts.

Then we saw the miserable consumer confidence data which came in at 44.5 for August; significantly below the 52.0 consensus and July's 59.2. This is self-explanatory.

So, with overall economic numbers not being positive, especially the recent ones, what explains the lack of at least some profit-taking today after Monday's near 3% rise in S&P 500?  And the answer is: the greatest, the best and least questioned insurance coverage provided by the Fed. Yes, as mentioned before, they have created a win-win situation, at least for now. Even one of the three Fed dissenters, Kocherlakota, said he might now support a QE3. This may tell you that he is realizing the situation may be worse than expected, even after the Fed's last two meetings in August.  He may be thinking that it could get so bad that the risk of inflation can be ignored and further monetary easing can be implemented. 

Tomorrow's ADP and Challenger employment figures will provide more color going into Friday's 'official' employment numbers. Although the market was up slightly today, VIX was also up, approx. 2%. So there is a chance of a siginficant move up or down in VIX and VIX ETFs during the next couple of days, from which one may be able to benefit by trading VIX (or VIX ETF) options.