Market Powering On

The historic ‘going negative’ action of the ECB on June 5th, coupled with good Non-Farm Payroll report from US, is dampening the allure of ‘Sell in May and Go Away’ approach to investing this year. We will talk about that approach in another post, but the combined effect of the two major events of the first week of June is that the forces unleashed by the major central banks are keeping the bull market ploughing through traditionally weak months of a year.

The S&P 500 has been on a consistent uptrend since March 2009, when it bottomed after the great financial crisis. The market is in uncharted territories with no prior resistance levels looming on the horizon except for the psychological numbers – 2000 for S&P 500 and 17000 for Dow Jones Industrial Averages..


Week In A Nut Shell:

  • Most global indices rose for the week except for the Shanghai, Hong Kong and Sydney. The 3-month picture is also similar. Only NASDAAQ, Russell 2000, Shanghai and Tokyo declined over the past 13-weeks period.
  Week  3-Month   Week 3-Month
North America   Global Dow +1.3% +4.1%
DJIA +1.2% +2.9%
S&P 500 +1.3% +3.8% Latin America  
NASDAQ +1.9% -(0.3)% Brazil 3.7% 14.9%
Dow Transport +1.3% +8.1% Mexico 3.4% 9.9%
Russell 2000 +2.7% -(3.2)%
Europe Asia & Pacific  
UK FTSE 100 +0.2% +2.0% Shanghai -(0.5)% -(1.4)%
German DAX +0.4% +6.8% Nikkei 225 +3.0% -(1.3)%
French CAC40 +1.4% +4.9% Hang Seng -(0.6)% +1.3%
Spain +2.5% +8.9% South Korea 0.0% +1.1%
Italy +3.1% +8.0% Australia -(0.5)% 0.0%
Switzerland -(0.2)% +3.4% Bombay +4.9% +15.9%
Russia +4.9% +10.07% Indonesia +0.9% +5.4%
Turkey +1.4% +27.4% Thailand +3.0% +7.6%
  • Treasury yields rose but are substantially lower than 3 months ago.
30 Years Yields +3.7% -(7.7)% 13 Week Yields -(6.7)% -(37.8)%
10 Years Yields +5.7% =(6.9)% 30 Years Bond -(1.5)% +3.8%
  • Commodities generally fell for the week but for energy and precious metals. Most also fell during the 3-months period.
GSCI Index -(0.5)% -(0.6)%
Light Crude +0.1% +0.2% Wheat -(1.4)% -(5.5)%
Nat Gas +3.8% +2.1% Soybeans -(2.4)% 0.0%
Gold +0.5% -(6.4)% Sugar -(2.6)% -(6.1)%
Silver +1.7% -(9.2)% Coffee -(3.0)% -(12.6)%
Copper -(2.1)% -(0.8)% Cotton -(1.7)% -(7.1)%
Corn -(1.6)% -(6.3)% Cocoa -(0.2)% +2.9%
  • Forex had a volatile week. Dollar index went up and then down and by the end of Friday was almost unchanged.
Dollar 0.0% +0.9%
EUR/USD +0.1% -(1.7)% AUD/USD +0.3% +2.9%
GBP/USD +0.3% +0.5% NZD/USD 0.0% +0.4%
USD/JPY +0.7% -(0.7)% USD/CAD +0.8% -(1.4)%
USD/CHF -(0.1)% +1.8% AUD/JPY +1.0% +2.2%

The Economic Report Card

  • Asia-Australia
    • Japanese Capital Spending beat at 7.4% the forecast of 5.7%; Monetary Base y/y chance was 45.6% compared to 51.2% forecast;
    • China’s PMI numbers were mostly in line – Non-Manufacturing PMI came at 55.5 and the HSBC Final Manufacturing PMI at 49.4 and  HSBC Services PMI at 50.7
    • China’s Trade Surplus was 35.9B beating the forecast of 22.6B
    • Aussie Building Approvals month/month fell by -5.6% compared to forecast of a gain of 2.1% indicating potential weakening of economic activities;
    • Australian Retail sales m/m disappointed at 0.2%; Current account improved to -5.7B;
    • RBA maintained the Cash Rate at 2.5% and Australian GDP Q/Q beat at 1.1%
  • Europe
    • On Monday, German CPI m/m came at -1.1% lower than expected 0.1%;
    • Euro CPI Flash estimates y/y came at 0.5% below consensus of 0.7%
    • EU PMI across the board disappointed – Swiss 52.5 vs. 55.7; Italian 53.2 vs. 54.3; Spanish 52.9 vs. 52.6
    • UK PMI was inline at 57 but m/m Individual Lending dropped to 2.4B and M4 Money Supply m/m shrank by -0.2%
    • On Tuesday, the EU saw Unemployment rate fall – Italian rate fell to 12.6% from 12.7% and Euro level rate fell to 11.7% from 11.8%; Spain’s unemployment numbers fell by -111.9K
    • On Wednesday, UK Services PMI numbers came in line at 58.6
    • On Thursday, BoE maintained the Bank Rate at 0.5% and the Asset Purchase Facility at £375B
    • ECB dropped the minimum Bid Rate to 0.15%
    • EU Zone trade balance improved – Germany’s was 17.7B beating estimates of 15.1B; French Trade Balance was -3.9B, also beating the forecast
    • UK’s Trade Balance disappointed at -9.6B versus -8.7B forecast
  • North America
    • In US, ISM finally nailed the final number of 55.4 in three attempts. Earlier wrong reporting caused minor upheaval in the market; The Final Services PMI was inline at 58.1; Factory Orders were inline too at 0.7%
    • US Total Vehicle sales came at 16.8Million, better than estimates
    • US’s ADP Non-Farm Employment Change was 179K below the estimates of 217K;
    • US Revised Non-Farm productivity beat at -3.2% so did Revised Labor Unit Costs at 5.7%
    • US Trade Balance disappointed at -47.2B versus forecast of -40.8B
    • US Unemployment Claims were as expected at 312K so was the Non-Farm Employment Change at 217K
    • US Unemployment rate dropped to 6.3% and the Consumer Credit m/m beat at 26.8B
    • Canadian Trade Balance disappointed at -0.6B so did Building Permits at 1.1%, Ivey PMI at 48.2 and Unemployment rate at 7.0%. Employment Change was as estimated at 25.8K

Technical Perspective

There is no doubt that based upon the current trifecta of accommodative monetary policies, price-action of major indexes and the lack of significant bad economic report, the bull market will continue. Also without doubt, from time-to-time it would experience minor pullbacks and corrections, which are normal for a healthy market, but the bias will be up. It is also true that these pullbacks would offer reasonable opportunities to profit from going bearish and we will write about them when they emerge. The challenge, as usual, is to understand the current situation and identify available opportunities.

The S&P 500 ($SPX) is breaking above an up moving line that acted as a resistance three times (point A, B and C in the chart below) before in the recent past. These touches to the resistance line coincided with short-term reversal of bonds (points AA, BB and CC). Last week S&P 500 broke above the resistance trend line and bonds seems to be staging a reversal. Usually, a reversal in bond leads to pullback in S&P 500 but not always.


Not all sectors are doing well relatively. Out of nine S&P Select Sector SPDR ETFs, three are underperforming S&P 500, three are very close in performance and three are doing 3% to 7% better. Over the last three-month, the best performing sector is energy followed by Utilities and Staples. Technology, Industrials and Materials are doing only marginally better than S&P 500 whereas Financials, Health Care and Cyclicals are laggards.


From another perspective, over a shorter time period, the Utilities are still rising compared to S&P so are Financials and Cyclicals.

Financials and Consumer Discretionary Poised To Out Shine S&P 500

Relative to SPY, XLF is bottoming in performance (see XLF/SPY chart). XLF/SPY is making a rounding bottom after making a Double Bottom in mid May. XLY/SPY is also making a rounding bottom. Both are ready to break out which may result in them out-performing SPY.

XLF_SPY_140606 XLY_SPY_140606

Small Caps Show Potential

Compared to other major indexes, Russell 200 was not doing as well over the last three-month period – it is down -3.2% versus 3.8% gain for S&P 500. This may be changing. IWM/SPY is making a short-term Double Bottom and is ready to break above the intermediate top. So small caps are poised to out-perform large caps.


Tech To Re-Take Leadership

For most of Feb, March and April, QQQ underperformed SPY. Then it May it started to outperform SPY. Now QQQ/SPY is in the process of making a handle of a Cup-With-Handle pattern. A breakout above this level will result in techs taking leadership.


Eastern Europe, Russia, India and Italy Out Performing

EPI_SPY_140606 ESR_SPY_140606 EWI_SPY_140606 RSX_SPY_140606

Looking Ahead To The Week Of June 9th, 2014

Economic Reports

Major expected economic reports are

  • Monday
    • Australia – NAB Business Confidence
    • China – CPY y/y – expected 2.4%; PPI y/y – expected -1.5%
    • Canada – Housing Starts – expected 185K
  • Tuesday
    • French Industrial Production m/m
    • UK – Manufacturing and Industrial Production m/m ; NIESR GDP Estimates
    • US – JOLTS Job Openings; Wholesale Inventories m/m
    • Japan – BSI Manufacturing Index
    • Australia – Westpac Consumer Sentiment
  • Wednesday
    • UK – Claimant Count Change; Unemployment Rate; Average Earnings Index
    • NZ – Official Cash Rate
    • Australia – Employment Change; Unemployment Rate
  • Thursday
    • US – Core Retail Sales (expected 0.4%); Retail Sales (expected (0.4%); Unemployment Claims (306K); Business Inventories
    • Japan – Monetary Policy Statement
  • Friday
    • Japan – Revised Industrial Production
    • China – Industrial Production (8.8%); Fixed Asset Investment
    • Canada – Manufacturing Sales m/m
    • US – PPI m/m (0.1%); Core PPI m/m (0.2%); Prelim UoM Consumer Sentiment (83.2)

Earnings / Splits

Some planned events for the next week.

  • Monday 9th
    • Hertz Global (HTZ) earnings after close – estimate 0.09
    • Pep Boys (PBY) earnings after close – estimate 0.03
    • Synergetics (SURG) earnings after close – estimate 0.03
    • Union Pacific (UNP) to split 2:1
    • Appale (AAPL) to split 7:1
  • Tuesday 10th
    • Radio Shack (RSH) earnings before open – estimate -0.74
    • Science Applications (SAIC) earnings before open – estimate 0.67
    • Ulta Salon (ULTA) earnings after close – estimate 0.074
  • Wednesday 11th
    • H&R Block (HRB) earnings before open – estimate 3.23
    • Restoration Hardware (RH) earnings after close – estimate 0.10
  • Thursday 12th
    • Lululemon Athletica (LULU) earnings before open – estimate 0.32
    • KBR (KBR) earnings after close – estimate 0.37
    • Sunoco Logistics to split 2:1

Many of our long terms strategies are doing pretty well and we will soon post updates for them. So are our seasonal strategies, some of them have exited within their normal exit window and some are moving along as expected.

Have Great Trading Week.

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