Is now a good time to get in?

A few negative economic data points helped keep the stock market from posting new index highs yesterday.  The most important data released was new housing starts and initial jobless claims that were more negative than anticipated. New housing starts dropped 16.5 between April and March 2013, which is in line with our general view that the housing market can’t improve substantially without more jobs created in the next few months. Housing prices fluctuate due to short term supply considerations but firms don’t start building new homes unless they know they will retrieve more than their investment capital.

Initial jobless claims rose more than expected in the week ended May 11. the U.S. Labor Department reported Thursday.
Jobless claims jumped by 32,000, totaling 360,000.  The market is in somewhat of a sweet spot where news about the Fed easing will be countered by poor economic news and mixed data. We are neutral in the short run as we look for new buying opportunities.

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The Most Hated Stock Market Rally Just Got More Institutional Friends:

Stocks jumped yesterday as more smart money stayed bullish and shorts were forced to spend money on ‘shovels’.  Some of the “hold your nose buying” we said would occur happened as big players stepped in and a parabolic move up took shorts out of the market.

Although some talking heads that were boldly short just realized the impact of global central bank easing, its effect on equities and boldly, literally ‘fought the Fed’, we’ve been positive on stocks long run for a couple of years now – more bullish with each QE.

ToryCapital relative strength indicators are positive and we remain constructive while looking for opportunities. The follow through yesterday is an intermediate bullish signal but many traders are still waiting to get into this market.  The market has only had brief 3 percent corrections in the last few weeks so there is a higher probability that attractive entry points may be coming in the next few sessions.

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Tech takes lead in May 2013 Stock Market Rally:

Stocks continue rallying with the NASDAQ hitting a 12 year high today as positive sentiment keeps lifting the major averages.  We were reticent to be more than neutral over the past week and not much happened until today. The U.S. stock market rally still has legs and shorting stocks hasn’t worked for weeks. The next leg of the rally may continue to be lead by techs, financials and small caps.

The rotation from staples and defensive stocks signals a healthy market but a new rotation will occur if the rally continues to pick up steam.  We are constructive but cautious and leaning bullish as the general upward trend has not abated.  Since our last article and brief break, the market hasn’t done much but the underlying sectors we watch carefully such as tech took leadership yesterday which is a reason to maintain positive sentiment on equities.  See our most recent technical analysis chart here. 

U.S. Stock Market Major Index Statistics for May 13, 2013:

DJIA:15,091.68−26.81 (0.18%)
NASDAQ:3,438.79+2.21 (0%)
S&P 500:1,633.77+0.07 (0%)

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Sell In May And Go Away Isn’t Working – Yet?

The Dow Jones Industrial Average closed above 15,000 for the first time ever as positive market sentiment kept shorts from stepping in. The rally in U.S. stocks has stopped large distribution days from occurring but it’s possible that institutions could pause in the near-term as longer term price predictions are recalculated due to the sharp upward slope of the last few weeks.  The intermediate term trend has held but the rise/run rate of the S&P 500 suggests an easing of relative strength compared to other indexes we follow and the NASDAQ was sluggish today which is reason for caution. See our latest technical analysis chart for the S&P 500 here.

This week is short on data so look for developments from Europe and Asia to change market sentiment.  With no real catalyst to move the market higher in the short term, some investors may fade the rally and look for new entry points.  The USD/EUR trade as well as gold and oil could help tell the global stock market story that should have more indexes hitting new highs across the globe.  The Nikkei hit a near 5 year high yesterday and the global equity story is not over yet.  Watching U.S. small caps, tech, financials and homebuilders is a must.  The familiar cliche “sell In May and go away... isn’t working yet but we are monitoring institutional buying and money flow into U.S. equities carefully.

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Japan follows U.S. equity rally 2013:

The U.S. stock market isn’t the only one on a tear.  After Malaysian stocks hit new highs yesterday, Japan’s Nikkei crossed 14,000 for the first time since June 2008.  Markets are receptive to easing worldwide with stocks hitting new highs across major indexes mostly relative to before the financial crisis and in several cases like the S&P 500, new all0time highs.

Yesterday we mentioned the global equity story heating up and the impact it could have on U.S. risk aversion.  The long run rally may be sparked by the U.S. but capital will flow into new sources where markets have a larger growth story.  This will make small caps, mid caps, tech and financials key for analyzing growth prospects from various regions.

The S&P 500 is now out of a tight range and base it formed a few days ago. We continue to look for entry points on weakness but it’s also important to have a global perspective while keeping central bank calendars front and center as more easing/neutral signaling occurs.  It’s time to be constructive but cautious during this phase of the rally in the short-run.

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Did Siegel Low-Ball It?

The stock market is on a tear with several sectors rising.  Asian stocks were up big today with Malaysian stocks after election results lifted sentiment with volume was up 2000 percent from the 30 day moving average.  Globally, there may be a shifting tide towards growth and risk.  The S&P 500 needs to move a few points higher to show the long term trend rate of growth may be shifting for the first time in two decades. The Dow crossed 15,000 on Friday and the strong open in Asia with claims in Europe that ‘austerity is dead’ are reasons to be bullish in the short/medium run.  Buying on dips could be a good strategy if new support levels for the S&P 500 can hold for the next couple of weeks as more ‘hold your nose buying’ occurs.

The Jobs Numbers Could Go Higher

The revision to last month’s jobs numbers from 88,000 jobs created to 138,000 means April 2013 numbers could be revised to 225,000.  This would be the start of a new consumption cycle in the U.S. and signal the end of the new normal.  Consumers may be willing to take on more debt and make larger purchases if they feel they are likely to be employed next year, especially if they see salary increases.  The last jobs report showed hours per week worked have stopped rising, wage increases are the next step.

Is BRIC Back?

There is preliminary evidence that equities across the globe are back although Brazil Russia India and China got most of the attention in the last cycle.  U.S. equities could face competition if PE ratios abroad turn the corner – and the race is on.  The return of the transports, tech, small caps and mid caps last week changed medium run relative strength indicators for U.S. markets versus other major indexes.  This should be monitored carefully.  The U.S. stock market still appears in rally mode and stock/sector picking will be key to managing returns.  The Dow could be on its way to 16,000 and Professor Jeremy Siegel’s prediction featured in Barrons a few months ago seems modest now.

ToryCapital when the Barron’s/Jeremy Siegel Dow 15,000 prediction article came out:

Dow Closes In On 13,000 February 2012: Is 15,000 Really Possible This Year? February 17, 2012

Barron’s may have moved early this week with predictions of Dow 15,000 but there is some reason to believe that with heightened uncertainty and bad calls from economists who are no longer sharp at gauging trends based on electronics or the internet, the wall of worry could lower with equities moving up.  Siegel could be on to something. Read more here

Two Year Chart Of The S&P 500 ETF (Spider)

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Will The Bulls Remain In Control?

The stock market soared after the latest employment numbers were released today.  Most economists and traders, including ToryCapital.com missed the unemployment number for April.  The jobs number was far more than what we were expecting at 63,000 and the number came in over our highest estimate of 88,000 with 166,000 new jobs created.  The news sent stocks jumping in the pre-market and held most of the gains throughout the day.

The financials, small caps and tech led the rally with old favorites like Apple regaining steam.  This is a huge reason to be bullish in the short and intermediate run.  We addressed sector rotation two weeks ago reminding our readers that the market seemed poised for tech, small caps and financials to regain leadership

“Usually in a long-run rally, tech and financials are leaders but this extended rally has seen a rotation of sector leadership from housing, financials and tech to consumer staples/defensive plays.  Now the rotation seems to be headed toward risker assets again. See our Technical Analysis Note: S&P 500 April 11, 2013

The bulls have momentum and follow through early next week would indicate the stock market rally could continue if “Sell in May and Go Away” doesn’t hold as money managers look to score well in the second quarter.  The tone of the market has a mid 1990s/mid 2000s feel and the word is beginning to get out to the mainstream each time the market hits new highs.  The rally may have more legs as most people are just getting the mail for the returns on their IRAs for the quarter that are probably positive.  Stay tuned for our latest technical analysis note this weekend and see yesterday’s chart here.

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The Jobs Number Tomorrow Could Set Tone For “Sell In May?….”

Initial jobless claims fell to a seasonally adjusted 324,000 for the week ending April 27, according to a Labor Department.  Claims for jobless benefits fell 5.3 percent after dropping 2.8 percent in the prior week and most economists were expecting an increase to 345,000.  The initial jobless claims data doesn’t change our view that unemployment for April 2013 will be low.  We predict a modest 63,000 increase with a margin of error of 25,000 (weekly jobs data is volatile).

The Bullish Case:

The number will set the tone for the market tomorrow with bulls believing the Fed – “…. is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.” Read more on the FOMC rate decision yesterday here.  Follow through from today’s activity would put many sectors at new multi-year highs.

The Bearish Case:

Bears will believe the economic data is turning around and the U.S. may be falling into a double dip recession similar to the U.K.  Although the likelihood of a double dip recession is less than 10 percent in our view, this doesn’t mean continued-sluggish, slow ‘recession like’ economic under-performance isn’t possible.

The S&P 500 continues to hit new highs and is well within the technical analysis relative strength/rise-run channel we identified a couple of weeks ago that keeps us bullish in the intermediate run, but market momentum could change sharply with the data tomorrow.

HERE IS OUR LAST TECHNICAL CHART OF THE S&P 500 ETF THAT INDICATED BULLISHNESS ON APRIL 22, 2013

 http://www.torycapital.com/2013/04/22/technical-analysis/chart-sp-500-support-resistance-levels-april-22-2013/

THE SAME CHART – UPDATED MAY 22, 2013

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FOMC Does Not Signal End To QE:

The FOMC’s statement today was strong/bullish but most of the attention was not on the lack of inflation or that the FOMC could make additional bond purchases.  ADP’s data today showed the economy is exceptionally weak with only 119 private jobs in April 2013

The 3 Most Important Highlights From The FOMC Rate Decision May 1 2013

1. Information received since the Federal Open Market Committee met in March suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown some improvement in recent months, on balance, but the unemployment rate remains elevated. – the Fed recognizes the economy is still in slow growth mode and won’t get caught flatfooted again.
2. The Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective. – Most people didn’t notice this.  The FOMC made it very clear, risks are to the downside and inflation is low.  Absolutely no signal QE will end.
3. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. Here’s where we disagree with the Fed.  A stronger statement would have gotten rid  of the word reduce as the economic data continues to be week.

We believe this was a strong statement that favors risk assets.  The current technical analysis trends in equities show a slowdown in relative strength indicators that could make buying on dips good opportunities if money flow out of bonds continues – worldwide. We are bullish in the intermediate run.

Read the Full FOMC Rate Decision Below -

For immediate release

Information received since the Federal Open Market Committee met in March suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown some improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

U.S. Stock Market Major Index Statistics for May 1, 2013:

DJIA 14700.95   -138.85 -0.94%
NASDAQ 3299.13   -29.66 -0.89%
S&P 500 1582.70   -14.87 -0.93%

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Disappointing First Quarter 2013 GDP Growth At 2.5 Percent Will Keep Fed On Hold:

Sometimes bad news is good news.  Yes, everyone would prefer better economic numbers, but that’s not happening and the political economy risk that has threatened the U.S. economy for the last few years is taking root again. Sequestration and the increase in payroll taxes are contributing to weaker growth.  On Friday, the gross domestic product data for the first quarter of 2013 was released and it was much less than most economists were expecting.  U.S. growth was 2.5% for the quarter and that isn’t enough to expand the U.S. economy which has been characterized by high unemployment.

U.S. equities didn’t fall significantly on Friday and have held up for the last few days although the economic data has been weak.  The sluggish economic growth data will probably keep the Fed from signaling any desire to interrupt the money supply or QE anytime soon.  The Fed has no issues regarding inflation and could surprise markets with a tone that could be market constructive.  We expect the unemployment numbers for April 2013 to show another month of weak growth at around 63,000 new jobs +- 25,000.

Equities are trading in a tight range that makes us neutral in the short-run until more volatility occurs based on the data in the week ahead as well as Fed-speak.  Last week we mentioned durable goods could keep the Fed on hold and GDP numbers confirmed the U.S. economy is vulnerable.

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