Hello [MM_Member_Data name=’firstName’],
U.S. stocks were again mixed on Friday. Banks and other financial stocks led the gainers. Energy companies also rose. Utilities stocks were the biggest laggard.
I prepared a full momentum analysis for you below, please review since all three market analysis methods [price, momentum and internals] are pointing to increased vulnerability and selling pressure to begin over the near term time frame.
Global Economy – European equities moved higher even after UK Prime Minister May’s Conservative Party lost its majority in parliament, which weakens her hand in Brexit talks with the European Union that are scheduled to begin in 10 days.
GBP/USD fell to a 1-1/2 month low on the fallout from the surprise UK election results, but the impact on the rest of the global markets was muted.
European stocks found support on signs of strength in the German economy, the Eurozone’s largest, after trade date showed German Apr exports and imports rose more than expected.
Expectations of a hung parliament in the UK failed to dent optimism in Asian markets as China’s Shanghai Composite rose to a 1-1/2 month high and found support on an as-expected increase in China consumer prices and a slower-than-expected pace of increase in Chinese producer prices.
The German Apr trade balance was in surplus by +18.1 billion euros, narrower than expectations of +23.0 billion euros. Apr exports rose +0.9% m/m, stronger than expectations of +0.3% m/m. Apr imports unexpectedly rose +1.2% m/m, stronger than expectations of -0.5% m/m.
UK Apr industrial production of +0.2% m/m and -0.8% y/y was weaker than expectations of +0.7% m/m and -0.3% y/y.
UK Apr manufacturing production of +0.2% m/m and unch y/y was weaker than expectations of +0.8% m/m and +0.7% y/y.
China May CPI rose +1.5% y/y, right on expectations. May PPI rose +5.5% y/y, weaker than expectations of +5.6% y/y.
U.S. Economy – In yet another negative for second-quarter GDP, wholesale inventories fell a sharper-than-expected 0.5 percent in April.
The draw is centered in autos but also includes other durable goods and nondurable goods as well. Sales at the wholesale level were weak, down 0.4 percent in the month and justifying the inventory draw.
The wholesale stock-to-sales ratio holds unchanged at a still lean 1.28.
Market Sentiment – Long bond continues to weaken as we get closer to upcoming FED rate hike.
Flight to quality longs continue to liquidate as the odds of FED raising rates during June 14th meeting appears to be almost a certainty. Technically, the probability of a rate hike is 99%, which compares to 96% yesterday.
Expect price to continue moving south as we head towards the 50 day moving average to the downside. Once price hits the 50 day line, I’m expecting congestion and consolidation, followed by further downside action, as the long bond finally reverts back to the long term trend.
If you expand the bond chart to a further time frame, you will notice that the long term trend is bearish and unless the stock market sees major selling pressure and increased volatility in the short term, the odds of seeing major spikes in the bond market over the next few sessions is highly unlikely.
Stock Market Analysis – Stocks are slightly higher in spite of the uncertainties stemming from former Director of the FBI Comey’s testimony on Thursday with SP 500 and Dow Jones making new highs for the session, which is unexpected, since the level of uncertainty entering the market is substantial.
Technically, all indices except for the russell 2000 is trading substantially higher and moving extensively into overbought price territory and we are seeing massive narrowing of momentum at this time.
If you look at percentage of stocks in the SP 500 trading above the 200 day moving average, you will notice that the percentage moved from 80% percentile to 70% percentile, but price is making new highs…this is called narrowing of momentum and occurs when smaller percentage of stocks in the index are working harder or generating more momentum and causing price to go higher, even though there’s a substantially lower number of stocks causing the upside.
This is equivelent to having to push harder on the gas pedal to generate the same speed in the car because the engine is weakening. And that’s exactly what we are seeing in the current market cycle at the present time from the overall stock market.
When there’s a lower percentage of stocks causing upside momentum it creates much more vulnerability in the overall market, which taken together with the current overbought price levels in major sectors and indexes creates strong possibility for corrective pressure in the near term.
Once momentum levels decline below 60% percentile, institutional traders will be less inclined to buy into the current market cycle, which will increase volatility and cause price to plummet or correct over a short period of time.
This typically creates balance to overall market and allows the market to trade higher once again.
To show you more evidence of “narrowing of momentum” take a look at the QQQ – which tracks the top 100 NASDAQ stocks. Few weeks back 85 out of 100 stocks were trading above the 200 day line and now only 75 stocks are trading above the 200 day line, but price is at or near all time highs.
As you can see from the chart below – while internally the index is weaker and as result more vulnerable, price remains near all time highs.
However, RSI levels are extremely stretched out and overbought, which tells us momentum levels have more than likely peaked out, especially wiht the renewed uncertainty in Britain and in U.S. in relation to Comey testimony.
Expect price to decline to 50 day line in the near term and VIX levels to begin spiking over the next few weeks. There’s too many mixed signals to see further momentum levels and that’s based on price, momentum and market internals.
I will update you tomorrow and prepare for some minor selling pressure ahead.
Roger Scott