Tower Private Advisors
- Rally in U.S. equities; mixed, abroad
- Technical analysis 101
- Interest rates hit a short-term top
- Soggy economics
- Thought experiment
Capital Markets Recap
Recent action in the widely-followed S&P 500 index has followed nearly a textbook, technical-analyis 101 path. See the chart below. The purple line below is the 55-day moving average, a rolling average of the last 55 days’ closing prices. It’s the average price paid by investors over the last 55 days to buy the index. There were three, circled instances when, over the last three months, the index touched that level (first three circles) and found the support of buyers . Those were seen as buying opportunities by market participants. Finally, though, the support was too weak–i.e. sellers overcame buyers; supply, demand–and the market dropped sharply through the support of the 55-day moving average…and found support (fourth support circle) at the 117-day moving average, something I’ve followed for several years. Market rallies for three days, running into support-become-resistance–the 55-day moving average. Based on two days of resistance there, buyers have their work cut out for them.
The yellow line in the chart above is the 200-day moving average, roughly the average price paid over the last 200 days. That comes into play in the chart below…sorta. In the chart below, it’s the 200-week moving average. And it stymied–great word, no?–the rise in the 10-year Treasury Note‘s yield. I think we’ll have another push lower in yield, after which point we might see the trends (i.e. the moving averages in the chart) begin to line up for a push higher–but still in the context of relatively low yields for some time to come.
Gonna keep this simple. There were several regional economic indicators. Those from the Richmond Federal Reserve, the Dallas Fed, and the Milwaukee Purchasing Managers index were sharply higher, the first two from recession-indicating negative readings. The Chicago Purchasing Managers index was much lower than the previous reading and what was expected. The picture below seems to capture much of the U.S. economy now…sharp rebound from March 2009 levels but a definite petering out from the strong readings of 2010 and 2011–even flirting with the expansion/contraction line of 50.
And that’s reflected, too, in the Citigroup U.S. Economic Surprise index, which shows an economy that has, of late, been more disappointing than economists have expected and with a decidedly negative trend–especially of late.
Lagging housing indicators showed a housing market that continued to improve. The Case-Shiller Composite of 20 major metropolitan areas showed a 12.05% increase on a year-over-year (ended April) basis. New Home Sales rose from 454,000 homes in April to 476,000 in May, and Pending Home Sales rose at a 12.5% year-over-year rate through May.
Initial Jobless Claims fell this week by 9,000 and still remain at a relatively low level. University of Michigan Consumer Confidence rose slightly, from 82.7 to 84.1. I’m certainly feeling more comfortable, as a result of
this chart falling gasoline prices. Maybe I shouldn’t be–well, okay, maybe other factors go into consumer confidence than gas prices. In fact, by looking at the decline in gasoline prices, maybe we should expect a decline in consumer confidence; it appears to be a near certainty based on past episodes.
The other biggish news on the week was that Q1 GDP was revised downward–rather significantly–from 2.4% to 1.8%. That’s quite a drop (25%) for the third release. The decline was due to a drop in personal consumption. In fact, revisions continue well past the initial release date. For example, the initial Q4 2008 release said the economy fell by (-)3.8%. The most recent release, in 2013, showed a catatonic economy, falling by a whopping (-)8.9% in Q4 2008. Albert Einstein was known for conducting thought experiments–in effect, conducting experiments in his mind–so let’s conduct one of our own, not knowing the actual outcome.
The stock market selloff ostensibly began on May 23, when Fed Chairman Bernanke reiterated what other Federal Reserve governors had been saying, that the Fed would begin to taper its purchases. At the margin, at least, it was moving toward tightening monetary policy, but this was really at the margin of the margin; i.e. tightening (raising short-term rates) is some time off. The Fed can only taper if the economy is showing strength. Ergo, if the economy weakens then the Fed has less cover under which to tighten monetary policy. So, here’s our thought experiment: news about a weaker economy means the Fed should have less cover to tighten and the market should have rallied on that news…did it?
The news came out Wednesday morning an hour before the markets opened…
Lo, and behold, here is the September S&P 500 futures contract, which trades nearly continuously, which did exactly that. That it started rallying before that is probably further evidence that numbers are getting leaked.
Next week is the ever-more-important Non Farm Payrolls report. It comes out on Friday and will include the all-important Unemployment Rate. When that sucker gets to 6.5%, up go short term rates–well, at least the Fed-influenced overnight lending rate (aka Federal Funds rate). Expectations are for 7.5%.
Speaking of rates, one of the reasons I recently cited for rates staying low is the budding recovery in housing. Check this chart out. With the Average 30-year Mortgage Rate up a bit more than 1%, Mortgage Applications fall by 33%. Holy fright! A good reason for the puppeteers to go to work.
Graig P. Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors