Saturday, February 6, 2016

Weekly Market Summary

Summary: NDX undercut its January low this week, and Friday's sell off was extreme enough that it is unlikely to mark the low. Negative investor sentiment seems to be feeding on itself, with sell offs leading to historic fund outflows and further sell offs. These extremes have reached a point where they most often reverse. Even if US equities are in a bear market, a rally of 7-10% is likely close at hand. Importantly, there has been no price action that yet suggests a reversal in the short-term trend.

* * *

After rising the past two weeks, during which oil prices rose 20% from their lows, equities fell hard this week. SPY lost 3%, RUT lost 5% and NDX lost 6%. The big winner was gold, which gained 5%. 

Given the close correlation recently between equities and oil, it's no surprise that oil led to the downside, losing 8%. This continues to be the biggest wild card driving the direction of equities.

Perhaps more surprising is that the dollar index fell nearly 3%. Should this continue, this would be a net positive for equities as the repatriated profits of overseas sales benefit from a higher trading partner currency. Naturally, the dollar cost of US products also becomes more affordable with a lower dollar. There is, therefore, a close link between the dollar and revenues for SPX companies: as the dollar falls, revenue growth increases. More on this in a recent post here (chart from Yardeni).

Friday, February 5, 2016

February Macro Update: Outside Manufacturing, Growth Remain Positive, But Slow

SummaryThe balance of the macro data from the past month continues to point to positive but sluggish growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.
    The main positives are in employment, consumption growth and housing:
    • Employment growth is close to the best since the 1990s, with an average monthly gain of 222,000 during the past year.  Full-time employment is soaring.
    • Recent compensation growth is the highest in more than 6 years: 2.5% yoy in January.
    • Most measures of demand show 3-4% nominal growth. Personal consumption growth in 2015 was the highest in 9 years.  
    • New housing sales, starts and permits remain near an 8 year high. 
    • The core inflation rate ticked up above 2% and to the highest rate since July 2012
    The main negatives are concentrated in the manufacturing sector (which accounts for just 10% of GDP):
    • Core durable goods growth fell 4% yoy in December. It was weak during the winter and there has been little rebound since. 
    • Industrial production has also been weak, falling -1.3% yoy.
    Prior macro posts from the past year are here.

    * * *

    Our key message over the past 2 years has been that (a) growth is positive but slow, in the range of ~3-4% (nominal), and; (b) current growth is lower than in prior periods of economic expansion and a return to 1980s or 1990s style growth does not appear likely.

    Modest growth should not be a surprise. This is the typical pattern in the years following a financial crisis like the one experienced in 2008-09.

    This is germane to equity markets in that macro growth drives corporate revenue, profit expansion and valuation levels. The saying that "the stock market is not the economy" is true on a day to day or even month to month basis, but over time these two move together. When they diverge, it is normally a function of emotion, whether measured in valuation premiums/discounts or sentiment extremes.

    Let's review each of these points in turn. We'll focus on four macro categories: labor market, inflation, end-demand and housing.

    Employment and Wages

    The January non-farm payroll was 151,000 new employees minus 2,000 in revisions. In the past 12 months, the average gain in employment was 222,000. Gains since 2014 have been the highest since the 1990s.

    Monthly NFP prints are normally volatile. Since 2004, NFP prints near 300,000 have been followed by ones near or under 100,000. That has been a pattern during every bull market; NFP was negative in 1993, 1995, 1996 and 1997. The low print of 84,000 in March, as well as the 'disappointingly weak' print in September, fit the historical pattern. This is normal, not unusual or unexpected.

    Wednesday, February 3, 2016

    Mid-Week Update

    Here are a few mid-week thoughts on the dollar, bonds, industrial production, high yield, corporate profits and the upcoming NFP report.

    The dollar fell 1.6% today. This sparked a rebound in US equities mid-day; SPY rose 2.5% from its intra-day low to close positive. In the bigger picture, the dollar index has been moving sideways since early 2015.

    Sunday, January 31, 2016

    Weekly Market Summary

    Summary: A more than 20% rebound in oil the past 10 days helped equities close higher a second week in a row. Importantly, there were two positive breadth thrusts this week: equities have strong tendency to add to gains over the following weeks. Despite equity's gains, investors remain very bearish, and this is also a tailwind into February. After a powerful move Friday, a giveback early in the week would be unsurprising.

    * * *

    US equities rose for a second week in a row.  SPY was up 1.7%, the Dow was up 2.3%. In contrast, NDX was up just 0.5%.

    The biggest winner was once again oil, which rose more than 4% this week. Since it's low 10 days ago, oil has risen more than 20%. There is little doubt that this has had an outsized positive affect on US equities.

    The longer term technical picture remains bearish for SPX. It made a lower high in November and a lower low in January. The 20-wma (blue line) is sloped downward, as it was in 2008 but also in 2010 and 2011. The pattern is bearish until SPX at least exceeds the prior high in November (2120 area): this is what separates 2008 from 2010 and 2011 (horizontal lines).

    Saturday, January 23, 2016

    Weekly Market Summary

    Summary:  Equities fell to their August/September lows this week and then reversed higher. A retest of the low would be normal, something to keep in mind in the event of an uncorrected rise from here. Any number of breadth and sentiment indicators strongly suggest that prices should rise further in the weeks ahead. The risk comes from oil prices, which remain too volatile to predict and which have been highly correlated to equities for several weeks.

    * * *

    After falling 3 weeks in a row, US indices closed higher. SPY and RUT gained 1.4% and the leader, NDX, gained 3%.

    Equities continue to follow oil, and oil closed the week 5% higher. During the course of most days, the correlation between oil and SPY has been uncanny, with the two making daily highs and lows within minutes of each other. This relationship will eventually fade, but for now it remains the main storyline in the markets.