Hello [MM_Member_Data name=’firstName’],
U.S. stocks are slightly higher Tuesday morning as health care companies including makers of scientific instruments and drugs rise.
Beverage makers are also gaining, leading household products makers upward. Stocks rose for the past three trading days following a steep loss last Wednesday.
Global Economy – European stocks are up on signs of strength in the European economy.
The German May IFO business climate rose +1.6 to 114.6, stronger than expectations of +0.2 to 113.1 and the highest since the data series began in 1991.
The Eurozone May Markit manufacturing PMI unexpectedly rose +0.5 to 57.0, stronger than expectations of -0.2 to 56.5 and the fastest pace of expansion since the data series began in 2014.
The Eurozone May Markit composite PMI was unch at 56.8, stronger than expectations of -0.1 to 56.7 and the fastest pace of expansion in 6 years.
The German May Markit/BME manufacturing PMI unexpectedly rose +1.2 to 59.4, stronger than expectations of -0.2 to 58.0 and the fastest pace of expansion in 6 years.
U.S. Economy – U.S. sales of new homes last month registered the biggest drop in more than two years.
The Commerce Department says new-home sales skidded 11.4 percent in April to a seasonally adjusted annual rate of 569,000. It was the biggest monthly drop since March 2015.
Economists had expected a more modest retreat from March sales of 642,000, which were the highest since October 2007. Sales in April were still up 0.5 percent from a year earlier.
Sales fell in every region, led by a 26.3 percent plunge in the West, the biggest drop there since October 2010.
Same store sales were up 2.0 percent year-on-year in the May 20 week, easing but still going strong after the previous week’s faster pace when the 2.4 percent year-on-year gain was the biggest since January 2016. Month-to-date monthly sales were down 1.1 percent versus
April, however, the third consecutive negative weekly reading in this comparison. But Redbook’s full month same store sales compared to the year ago period were up a respectable 1.9 percent, maintaining the stronger pace in place since April 8.
A noticeable pick-up in the services sector offset continued softness in manufacturing to lift the PMI composite by 1.2 points to a respectable 53.9 in the May flash.
The services PMI rose 1.5 points to 54.0 as new orders are at their best level of the year and employment is improving.
Market Sentiment – The long bond is mixed in spite of comments yesterday from Dallas Federal Reserve Bank President Robert Kaplan when he wrote two more fed funds rate hikes are appropriate for 2017.
The probability of a rate hike at the June 14 Federal Open Market Committee meeting is 78%, which compares to 83% yesterday.
Technically, don’t expect much range from the long bond over the near term and expect price to remain within the range that’s been building over the past several months.
There’s too much uncertainty for the long term down trend to resume and over the near term I’m expecting more congestion and random trading range.
Stock Market Analysis – Tech remains overbought at this time and the double top we are seeing at this time doesn’t look like it has enough momentum to generate the type of price action that will break the last swing high price.
Medium term momentum in the tech is declining right now and even if we rally to the previous high price, there simply isn’t data to push prices higher at this time….and there’s two primary reasons for that which I will explain below:
First, the biggest influence in the QQQ is the semiconductor index and earnings are behind us. Which means that unless there’s a major development ahead, the odds of seeing upside over the near term is highly unlikey, especially if Global pressure picks up once again.
Lastly, and this is a biggie, if you look at the percentage of stock trading above the 200 day line in the NASDAQ, you will notice that it’s been declining over the past several days.
While seeing over 70% of stockst trade above the 200 day line puts the NASDAQ in to overbought territory, what’s worse is the fact that price remains near all time highs, while the % of stocks is declining in the near term.
What you are seeing is called narrowing of momentum and typically leads to increased vulnerablity in the index and that typically preceeds selling pressure.
In conclusion, the fact that tech is becoming increasingly vulnerable due to long term momentum levels and vulnerability in the SOXX Index, is bearish for the overall market.
Furthermore, the broader market derives much of it’s market share from large cap tech stocks, which are part of the NASDAQ Index.
This taken with the fact that several blue chip sectors are trading below the 50 day moving average, increases odds of seeing minor corrective pressure in the short term.
I’m not expecting bear market, but I am expecting more downside and volatility in stocks in coming days.
I will update you tomorrow as usual.
Roger Scott