What goes up must come down. For every action, there is an opposite and equal reaction. Yup, I am referencing fundamental laws of the universe, Newtonian Physics, if you will. Well, actually the first maxim is a colloquial offshoot of the law of gravity, but it works. Just look at the market today. The price-action is huge and the movement is down, way down.
My-oh-my, things can change quickly in this current environment. The question is, why? Could it be the durable goods orders report, the US Services PMI, or the US dollar?
- Orders for long-lasting U.S. manufactured goods in August posted their biggest drop on record as the prior boost from aircraft unwound.
- Markit’s Flash reading for their U.S. Services PMI (Purchaser Managers Index) pulled back on a month-over-month basis.
- The U.S. dollar is the strongest it has been since June 2010, according to the U.S. Dollar Index.
Whatever the reason, the market is not a happy camper this morning and right after it seemed so happy yesterday. The VIX jumped some 2.6 points, which, by my Newtonian calculations, is just about a 31.5% jump. That, folks, is huge.
Looking closer, it must be the US dollar rising so much that is the problem for the market because it can’t be the US Services PMI. Although it dropped, still came in at a decent level.
- The index for September was reported at 58.5, which was below the consensus of 61.0 as well as the final August reading of 59.5.
And the durable goods order report, although showing the “biggest drop on record” actually was fairly strong and not as bad as the headlines and record-drop suggest.
- Civilian aircraft orders tumbled 74.3 percent. Transportation orders had soared 315.6 percent in July.
And there you have it. Airplane orders went up big in July and came down big in August -physics at work. I guess that is why that portion of the report is called volatile. The fact is, when transportation is stripped out, here is what you have.
- Excluding transportation, durable goods orders rose 0.7 percent after falling 0.5 percent in July.
- The underlying trend in new orders, however, is up and further gains are likely in the months ahead.
As well, go back just a bit earlier this month and you have another data point that is good news, not bad news.
- A survey early this month showed a measure of new orders jumped to a near 10-1/2-year high in August and businesses showed an increased appetite for capital spending.
Digging just a bit deeper, the report also tells us that business optimism is coming on and when businesses feel good, they spend money, which means more folks working.
- A rebound in business spending plans pointed to underlying strength in the manufacturing sector.
And more folks working means more consumer spending, which means more durable goods production – action, reaction.
- Manufacturing, one of the pillars of the economy, is being supported by firming domestic demand, which is helping to offset some of the weakness due to slowing growth in the euro zone and China.
There is another physical law, loosely stated, at play. Everything always seeks balance. The US is balancing out Europe and China, but when those two get back on the economic rails, watch out.
The market is showing no sign of letting go of its bearish bent today. Maybe it will later today. Hard to say. What is easy to say, though, is the market of late is demonstrating another physical law – entropy. A sub context of that law is that everything is always hurtling toward chaos, but in that chaos is order.
There is an order in the chaos of the market. I just don’t see it right now.
Trade in the day; invest in your life …
