[MM_Member_Data name=’firstName’],
U.S. stock indexes were mixed Friday, recovering some of their losses from a day earlier. Utilities and industrials companies led the gainers. Banks were the only laggard. Investors were sizing up the latest company earnings and deal news and adjusting portfolios in the final hours of the second quarter.
Global Economy – European stocks are up as a rebound in technology stocks boosts the overall market. Energy stocks are higher as well with Aug WTI crude oil up, the seventh consecutive session of gains, as oversupply concerns ease.
Signs of strength in Chinese manufacturing also improves confidence in the global economic outlook and gave equities a lift after the China Jun manufacturing PMI unexpectedly rose.
Weakness in industrial output undercut Japanese stocks as the Nikkei Stock Index fell to a 2-week low after Japan May industrial production fell -3.3% m/m, the biggest decline in 6-years.
The Eurozone Jun CPI estimate rose +1.3% y/y, stronger than expectations of +1.2% y/y. Jun core CPI rose +1.1% y/y, stronger than expectations of +1.0% y/y.
China Jun manufacturing PMI unexpectedly rose +0.5 to 51.7, stronger than expectations of -0.2 to 51.0.
German May retail sales rose +0.5% m/m, stronger than expectations of +0.3% m/m.
German Jun unemployment unexpectedly rose +7,000 to 2.547 million, weaker than expectations of -10,000.
Japan May industrial production fell -3.3% m/m, weaker than expectations of -3.0% m/m and the biggest decline in 6 years.
U.S. Economy – May was not a strong month for the consumer. Income did rise 0.4 percent but it wasn’t because of wages & salaries which could manage only a 0.1 percent gain.
Spending was weakest in non-durable goods, down 0.5 percent in the month but, in an important note, reflected low energy prices not low demand.
But spending on durables was also negative, down 0.3 percent. The positive is a moderate 0.3 percent gain for the biggest category and that’s services.
The consumer sentiment index slipped back to the least optimistic reading since the November election, falling 2.6 points in preliminary June to 94.5 with both the current conditions and expectations components falling.
The report said the move lower reflected easing confidence among both Republicans and Democrats. Econoday’s consensus for final June to remain at 94.5.
Earnings Outlook – Estimates have come down since the quarter got underway, but the magnitude of negative revisions nevertheless compares favorably to other recent periods.
Total Q2 earnings for the S&P 500 index are expected to be up +5.9% from the same period last year on +4.6% higher revenues. The Energy, Aerospace, Finance, Technology, Construction and Industrial Products are expected to be big growth drivers in Q2, with the quarterly earnings growth pace dropping to +3.3% on an ex-Energy basis.
Market Sentiment – James Bullard, president of the St. Louis Federal Reserve said weak data has undermined the Fed’s hawkish stance and the U.S. central bank should take a more reactionary approach if and when it sees more solid signs of economic growth.
The probability that the Federal Open Market Committee will increase its fed funds rate at the December 13 meeting is 54%, which compares to 53% yesterday.
Technically, bonds remain bearish, even though stocks are slightly weaker. I’m anticipating more downside to develop over the near term or possibly a bit of congestion, before price violates the 50 day line and reverts back to the main trend, which is lower.
We may experience a week or even two of congestion or slight bounce from the current levels, but ultimately, the long term trend is lower and it’s a matter of time till we see more corrective pressure develop in the near term.
Stock Market Analysis – Stocks are going through major rotation at this time. If you recall, over the past few months, tech has been leading, while blue chips have been lagging behind. Over the past few sessions, we’ve seen increased weakness in the overall tech sector, due to extreme weakness in semiconductor stocks.
At the present time, the top leading sectors over the short term are blue chips and are helping NYSE and SPY remain near record high price levels.
Keep in mind, my analysis only covers very short term time period and the long term trend in tech remains bullish. Till we see major violation of the up trend, I will assume the weakness in semiconductors, which is spilling in to the broader tech sector is temporary.
As you can see from the chart below, the SOXX index is now trading completely below the 50 day line and 10 day RSI is in the upper 30th level, which tells us that price is approaching oversold territory in the short term.
Once we get closer to 30 level, we can expect some degree of institutional accumulation to move into the overal market and cause mild upside to develop. July is typically not a busy month for institutional accumulation, but with earnings season approaching and without major fundamental damage, we can expect a reasonable pullback to the upside in the overall tech sector, which will be triggered by SOXX index.
The SP 500 touched the 50 day line and bounced back yesterday. I’m anticipating choppy conditions over the near term, since there’s no major catalyst till earnings to propel price higher.
Expect less volatility and more congestion in the near term, followed by more upside, since earnings are expected to outperform last few quarters.
Volatility as measured by the VIX remains near historic lows and during low volatility environment, the odds of seeing aggressive accumulation from stocks is likely in the near term.
I will update you tomorrow as usual.
Roger