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Courtesy of Scott Martindale, Senior Managing Director, Sabrient
After an 8-day bull run through last Thursday, the market has been consolidating those gains and trying to determine its next move. Mixed economic news has given the market both optimism and pessimism. Last Thursday’s promising ADP Employment Report gave way to Friday’s disappointing unemployment rate, showing an increase to 9.2%. Unemployment remains unacceptably high despite the expensive stimulus packages, and the Congressional fight rages on about how to handle the problem with the Federal debt ceiling. On the other hand, China’s torrid growth report gives hope to the state of the global economy.
But the big news today was Ben Bernanke’s testimony on Capitol Hill that the Fed stands ready to provide additional stimulus (read: QE3) if necessary, although it is far from unanimous among the Fed governors, particularly the inflation hawks. When QE2 ended at the close of June, the market kept on rallying without a hitch. Although no further dollars were to be printed and put into circulation, the dollars that already out there will keep circulating for the foreseeable future, and that seemed to be enough. Now it is all being reconsidered.
This is a tacit admission that the Fed underestimated the pace of economic recovery. The dollar weakened on the news (after recently strengthening on a flight to safety, given credit woes in Europe), and gold spiked to new highs. But despite the big drop in the dollar and an initial pop in stock prices, at the end of the trading day today, stocks were only up only slightly. The reality is that consumers drive economic growth long term, and they require both jobs and the “wealth effect” of rising asset prices—primarily housing. Although Federal stimulus has propped up the stock market, the primary engine for the wealth effect is real estate, and this asset class is showing no signs of life. Coupled with the dearth of new jobs, it appears that consumer spending doesn’t stand much of a chance.
As the market consolidated over the past week, Utilities and Healthcare have held up best, while Industrial, Financial, and Tech have lagged. Tech has been particularly weak this week.
Let’s examine the SPY chart. It made a double-bottom in June at the 200-day moving average followed by a textbook…
