Mid-May 2012 Markets Oversold, But Neutral On QE3 Predictions:
Stocks seem poised to go lower without a catalyst and bonds with ridiculously low rates seem attractive.
U.S. equities have dropped significantly but are still fairing better than stocks from around the globe. The U.S. stock market is by no means healthy and economic data hasn’t helped to indicate that fundamentals are solid in an overall bearish trading market.
Jobs data has been lackluster based on two months of unemployment numbers with April coming in at 115,000 new jobs added and March growth levels at 120,000. Initial jobless claims for the May 2012 have been reasonably tame and it’s possible that monthly unemployment figures could come in at around 140,00 +- 55,000 based on reasonable standard errors.
We would agree with estimates that call for May 2012 unemployment to reach about 120,000 again if jobless claims jump slightly and people leave the workforce which could still make unemployment drop to 8.0 percent. If unemployment reverses trends however, it would be a direct challenge to an already decreased stock market wealth effect globally which could make monetary policy less effective if markets move sharply and have anticipated poor future world jobs growth.
The U.S. stock market measured by the S&P 500 is closely approaching bear market mode and fell sharply from year to date levels this month. Globally, equities markets have taken a pummeling from all time highs and trends to the downside look more prevalent abroad than in the U.S. where gains are still up for the year.
U.S. equities looked poised to return into rally mode after hitting slightly lower levels but sellers seem in control until given more reasons to stop adding supply. We are neutral on current markets until a new directional trend is revealed short-term. Markets have already lost some steam and chances of movements in either direction seem plausible but ending QE2 in two weeks without a new QE3 program in a jobless recovery could have long term negative spillovers that were experienced by Japan.
Bonds on the longer part of the yield curve still look attractive when stocks are paying larger dividends. Risk aversion is reaching unusual levels but this doesn’t mean U.S. equities won’t get cheaper based on macroeconomic risk and fear U.S. banks could be “over-hedged” again. It’s a sector/stock pickers market that favors cash.