FMX | Connect – www.fmxconnect.com - (Reported 6/30/2010)
Excerpt from MARKET MUSINGS & DATA DECIPHERING
THE NEEDLE AND THE DAMAGE DONE
The needle, in this sense, is the equity market, and the damage done refers to the technical action.
First, the S&P 500 broke to a new intra-day low yesterday — 1035.18 — slicing below the 1,042.17 level on June 8th, the 1,040.78 level on May 25th, and the 1,044.50 level on February 5th. For the first time, the S&P 500 broke below the 1,040 threshold on an intra-day basis and this was a critical level, which up until yesterday, was holding. But no longer.
Second, down-to-up volume was 60:1. Only one of the S&P 500 companies saw their stock price rise (medical producer Zimmer Holdings), the first time that happened since September 29, 2008. History shows that from that day to the March 2009 low, the S&P 500 had 40% downside. Bear that in mind. All 10 industry groups in the MSCI World Index dropped and is down 10% for the year.
Third, Dow theorists will gladly point to the fact that the Transports have broken down here — down to levels last seen on February 18th and down nearly 10% in just the last 10 trading days. What’s Mr. Market us telling about the economic outlook? To think this happens right after a variety of analysts took up their ratings on the Transport group to boot.
Fourth, look at what the bond market is telling you about double-dip risks — with the yield on the 10-year note down below 3% for the first time in 14 months and the 5-year below 1.8%. The yield on the 10-year TIPS (the real yield) is down to 1.1% -- the lowest it ever got during the depth of despair back in March 2009 was 1.3%. The bond market is sending a very important signal to the equity market: reduce cyclical exposure and limit the risk in the portfolio.
Fifth, the 50-day moving average on the S&P 500 is now 1% and literally days away from breaking below the 200-day moving average; and the 200-day moving average is weeks away from beginning to start a descent. While so many strategists are looking at valuation metrics (only look compelling on consensus estimates for the coming year) to justify their bullish position (meanwhile, the Shiller ‘bird-in-the-hand’ P/E ratio is flagging a 20% overvaluation excess), what they are missing is a very negative technical picture. Not to mention the fact that the ECRI leading indicator is suggesting that we either have a double-dip recession or a growth relapse that is not consistent with 3% consensus views at this time.
Sixth, gold continues to do well. Why? Because it always does well in a deflationary depression. Remember, bullion in sterling terms doubled in value in the 1930s.
Seventh, commodity prices are rolling over — in contrast to last year, the highs are now getting progressively lower and so are the lows. Both the 50 and 100-day moving averages are now hooking down and the Baltic Dry Index is still flashing a sell signal (though we are longer-term bulls, the near- and intermediate-term outlook is muddled). Suffice it to say, the combination of the sliding Chinese stock market and the softness in the commodity complex is telling you a thing or two about how the global recovery is about to shape up. In a word — sputter.
OUR THEMES COME TO LIGHT IN THE MORNING PRESS
First theme is the income theme. Have a look at Stock Fund Inflow Interrupted in May on page A6 of the Investor’s Business Daily. U.S. equity funds suffered a $24.7 billion net outflow, way more than reversing the $13.2 billion April intake — and the largest withdrawal since March 2009 (bulls will likely come back and say this marked the lows).
Meanwhile, bond funds took in an additional $14.2 billion on top of $28.1 billion in April — this demographic drive for income is very clearly a secular trend and not some form of “capitulation” from Main Street. According to the weekly data from TrimTabs, equity outflows continued in June at a $10 billion pace while the fixed-income market attracted nearly $20 billion. Bonds do have more fun(d).
Second theme is deflation. On the demand side, it is clear that the trend towards frugality is posing a hurdle on what businesses can charge their consumers. Have a look at the what the WSJ said on this file (page B4) as it pertains to General Mills’ financial results: “Looking ahead, General Mills executives said sales in the company’s yogurt, cereal and other categories will keep growing in fiscal 2011 as consumers continue their trend of eating more at home.” Love it — eating in is in; eating out is out.
What the inflationists don’t take into account, is the severe competitive pressures that are intensifying in the retail sector. Same page of the WSJ on Barnes & Noble: “Mr. Souers [note: S&P Research Analyst] expressed concern about cannibalization of the physical book market by e-books, which he said would also pressure margins.”
LACKING CONFIDENCE
Consumer sentiment surveys are not what we would call first-tier indicators so there is always the risk of over-reacting to them, which may well have been the case yesterday — although, the consumer spending data is starting to look squishy-soft all of a sudden. The Conference Board consumer confidence survey has been around since 1967, so anything that’s been around for over 40 years has at least withstood the test of time — someone must be paying attention to it.
David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
Source: Market Musings & Data Deciphering
http://www.fmxconnect.com/
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