Hello [MM_Member_Data name=’firstName’],

U.S. stock indexes are falling for the second day in a row Wednesday as energy companies tumble with the price of oil. Banks also slipped following another decline in bond yields.

Global Economy – European stocks are up on signs of strength in the global economy. China’s May manufacturing PMI was unchanged at 51.2, stronger-than-expected, and Eurozone Apr unemployment fell to an 8-year low of 9.3%.

Gains were limited on weakness in energy producing stocks as Jul WTI crude oil (CLN17 -2.56%) falls -2.01%.

Fund selling is pushing crude prices lower on concern that cuts in OPEC oil production will not be enough to counter rising U.S. shale oil output.

China’s Shanghai Composite rose to a 3-week high after official data on May manufacturing and service activity came in stronger than expected. The Chinese yuan jumped to a 6-1/2 month high against the dollar on speculation the PBOC is intervening in currency markets to support the yuan.

The China May manufacturing PMI was unch at 51.2, stronger than expectations of -0.2 to 51.0. The May non-manufacturing PMI rose +0.5 to 54.5.

The Eurozone May CPI estimate rose +1.4% y/y, weaker than expectations of +1.5% y/y and the slowest pace of increase in 5 months. The May core CPI rose +0.9% y/y, weaker than expectations of +1.0% y/y.

The Eurozone Apr unemployment rate fell -0.1 to 9.3%, stronger than expectations of -0.1 to 9.4% and an 8-year low.

German May unemployment fell -9,000, less than expectations of -15,000. The May unemployment rate fell -0.1 to 5.7%, right on expectations and the lowest since German reunification in 1991.

U.S. Economy – Americans retreated from signing contracts to buy homes in April for the second straight month, a possible sign that a declining number of homes on the market are stifling sales during the traditional spring buying season.

The National Association of Realtors says that its pending home sales index fell 1.3 percent in April to 109.8, after slipping 0.9 percent in March to 111.3.

Same store sales were up 1.8 percent year-on-year in the May 27 week, moderately easing from the gains pace of the prior two weeks, which posted the largest year-on-year gain since January 2016.

Month-to-date sales were down 1.1 percent versus April, however, the fourth consecutive negative weekly reading. But versus the year-ago month, Redbook’s full month same store sales were up 1.9 percent, in line with the stronger pace established in mid-April after a sluggish first quarter.

Business growth is slowing in the Chicago area with weakness appearing in orders. The May PMI of 55.2, though down more than 3 points in the month, is still very solid but new orders slowed abruptly in the month to a 4-month low with backlog orders in contraction for a sixth straight month

Market Sentiment – Dallas Federal Reserve Bank President Robert Kaplan today said he expects U.S. GDP to grow 2% to 2.25% and he expects the unemployment rate will fall further.

The probability of a rate hike at the June 14 Federal Open Market Committee meeting is 89%, which compares to 89% yesterday.

Technically, the long bond is reaching for overbought price level. 10 day RSI is now close to 70 and the downside corrective pressure in the stock market is not anticipated to be significant enough to cause major rotation to move into the bond market, not with volatility levels remaining near historic lows.


Anticipate the current upside to fizzle out since the long term trend is bearish and more rate hikes are expected in the short term time period. While the FED is being extremely transparent which is helping drive volatility lower, it’s hard for bonds to trade higher unless they break the long term trend to the downside, which is not likely based on the current Geo Political and Global Environment.

Stock Market Analysis – Roughly 1 week ago I explained that stocks are getting a bit ahead of themselves and reaching for overbought territory to the upside.

Since that time we began seeing some minor corrective pressure to the downside in vulnerable sectors and I’m expecting more corrective pressure in the short term.

Major sectors are trading below the 50 day line and I’m expecting more vulnerability in the key sectors ahead. The Financial sector is now once again trading below the 50 day moving average and upcoming interest rate hike is already priced into the current market cycle and won’t add much upside to Financials over the near term.


Some savy investors and traders will argue that the tech sector which is not related to financials remains near all time highs and with very little vulnerability at this time.

The problem I’m seeing with the overall tech sector is two fold: first we have momentum levels that continue to decline rapidly, while price remains near firm. This tells us that the percentage of stocks causing upside is declining and that leads to short term corrective vulnerability in the tech.

Lastly and equally important is the SOXX Index, which tracks the semiconductor sector. The recent strength from the chips has been spilling over into the overall tech sector and has caused renewed strength in recent days.

The problem with the SOXX Index is the simple fact that chips are reaching into extreme overbought territory, which will limit the upside and cause weakness to increase in coming days in the overall NASDAQ – which is heavily influenced by the semiconductor index.


Notice that price is diverging from the oscillator and that’s aside from 10 day RSI moving into overbought territory to the upside in recent days. Expect pressure to move in to the SOXX index which will cause price to move lower and violate the 50 day line to the downside in the coming days.

Finally, if you have doubt about my analysis – take a look at the mid caps which typically lead the market due to high concentration of speculative stocks.


Remember, investors accumulate speculative stocks aggressively during bull market cycles and the present scenario is telling us that retail investors are becoming a bit more cautious.

Expect more downside from the overall market in the coming days.

Roger Scott