Hello [MM_Member_Data name=’firstName’],
Stocks are mixed and exhibiting very low volatility after the exteneded holiday weekend as energy companies fall with the price of oil and a dip in bond yields hurts banks. Tech stocks are bucking the trend at this time and trading slightly higher.
Global Economy – European stocks are down on expectations that stronger-than-expected U.S. economic data will allow the Fed to raise interest rates at next month’s FOMC meeting.
Weakness in commodity prices is also undercutting energy producing stocks and mining companies with Jul WTI crude oil at a 1-week low.
European stocks were also pulled lower after Eurozone May economic confidence unexpectedly fell for the first time this year, and as European banking stocks weakened on concern the ECB may be close to tapering QE after ECB President Draghi said the Eurozone’s economic upswing as “increasingly solid” and broadening.
Japan’s Nikkei Stock Index fell to a 1-week low as a slide in exporter stocks led the overall market lower after USD/JPY fell to a 1-week low, which reduces the earnings prospects of exporters.
U.S. Economy – U.S. home prices climbed in March at the strongest rate in nearly three year as a dwindling supply of houses for sale is causing prices to significantly outpace income growth.
The Standard & Poor’s CoreLogic Case-Shiller 20-city home price index released Tuesday rose 5.9 percent over the past 12 months ended in March, the most since July 2014. Home values are increasing at more than double the pace of average hourly earnings, making it more difficult for many people to afford to buy a home.
Americans increased their spending in April at the fastest pace in four months, bolstered by a solid gain in incomes. The strong results underscored expectations that the economy is poised to rebound after a lackluster start to the year.
Consumer spending rose 0.4 percent in April after a 0.3 percent rise in March, the Commerce Department said Monday. It was the best showing since December. Incomes also rose 0.4 percent, double the 0.2 percent March increase.
Consumer spending, which accounts for 70 percent of economic activity, grew at the slowest pace in seven years in the first quarter. That was a key reason the economy, as measured by the gross domestic product, expanded by just 1.2 percent at the start of the year. Economists are hopeful GDP growth will rebound to around 3 percent in the current April-June quarter.
Market Sentiment – The probability of a rate hike at the June 14 Federal Open Market Committee meeting is 89%, which compares to 88% on Friday.
Some of today’s selling appears to be linked to comments from Dallas Federal Reserve Bank President Robert Kaplan when said he expects the Federal Reserve will increase interest rates two more times this year. In addition, he said the White House’s projection of 3%, or better economic growth may be too optimistic.
St. Louis Fed President Bullard said that interest rates are already quite close or just a little below where they need to be and that “the first half of 2017 will be relatively ordinary, GDP growth of around 2%.”
San Francisco Fed President Williams said in Singapore Monday that “the U.S. economy is about as close to the Fed’s dual mandate goals as we’ve ever been” and that three interest-rate increases this year make sense.
Once the domestic political and global geopolitical issues settle down, the dominant influences of a stronger global economy and rising global inflation will ultimately take futures lower, especially at the long end of the curve.
Technically, the long term trend remains lower and has not been broken or violated to the upside at this time. The 10 day RSI is moving closer to the 70 level and that tells me that price is moving into temporary overbought territory in the short term.
Expect price to decline back to the 50 day moving average over the next few months, especially if stock market remains stable, which is likely since volatilty during summer months is lower.
Stock Market Analysis – Blue chips remain vulnerable and show the biggest downside over the past week’s trading session. I’m expecting more downside in the near term since there’s very little in the way of catalyst to cause price to increase in the short term.
It’s increasingly difficult for stocks to continue moving higher when key blue chip industries are weakening in the short term.
If you look at the Dow industrial, you will notice that RSI oscillator is making lower highs, while the last swing higher cause price to trade above the previous high price. This is classic divergence between price and oscillator and typically preceeds corrective pressure.
Expect price to decline back to the 50 day line in the near term and possibly lower before moving higher once again.
To confirm my anaysis we look at the tech which is showing 10 day RSI above 70 at this time. Price did not pullback to the 50 day line in some time and momentum levels are exhausted. Expect downside corrective pressure to begin taking the tech slighly lower in the near term.
This is needed before price begins moving higher once again, since markets are out of balance and are too biased to the bullish side of the spectrum.
Markets need constant flow of balance to move higher directionally and that’s not the scenario or the environment we are seeing at the present time.
Expect mild congestion and pause in the trend, especially since summer is a slower time for institutional traders and lastly, there’s very little in the way of catalyst to drive prices higher.
I will update you tomorrow as usual.
Roger Scott