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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