While recent US economic data has been good, including ISM, PMI, and housing data – there is much more that stock market bulls are ignoring.
There is currently a sense of euphoria that the market can no longer correct, especially with the Fed. I find this belief to be dangerous in the face of intermarket trends that do not signal inflation expectations. Here is some recent economic data and impending global macro points to be aware of.
US CONSUMER ON LIFE ALERT?
Personal income, consumer spending, and retail sales have been putrid, which makes up the majority of gross domestic product (GDP). Fourth quarter GDP was much worse than expected. While markets do look ahead, this is troublesome. The payroll tax and high oil prices have yet to fully play themselves out. The “sequester” will not help employment, GDP, spending, income, or confidence. The income gap in the US grows wider.
With a Congress that seemingly cannot agree on anything, are you willing to bet they come to an agreement on March 29 when funding for Federal government operations runs out? Are you willing to bet on continued earnings growth in multi-national S&P 500 companies with a raging U.S. dollar? Recently much has been made of Greenspan’s note of +128% earnings growth and +128% SPX incline since the 2009 low. Take out Apple and a handful of the mega-banks, and what is the number? It’s not even close. Earnings are primarily beating very low expectations, not experiencing raging growth. Hence the recent deal activity in a low interest rate environment. If you cannot get growth organically, then you manufacture it.
LOOK GLOBALLY
Is China starting to marginally slow again? The February HSBC PMI was a 50.4 versus a 52.3 in January. The government number was barely expansionary at 50.1 versus expectations of 50.5; hence the sudden decline in the Shanghai? Did China start tightening monetary policy too soon? Japan is still in a recession. They barely proved to achieve 1% inflation, what makes anyone so confident the BOJ can achieve 2% inflation? Their additional stimulus does not start until 2014. The recent absurd decline in the Yen makes it more expensive for Japan to import necessary natural resources such as oil, which their country does not produce.
On March 6, HSBC Emerging Market February PMI’s of 16 economies came in worse than expected at 52.3, and furthermore slowed compared to January’s 53.8. Within the report, it states that expectations for EMs are the highest since May 2012 (what happened then again?) The EEM is actually down -1.35% YTD. The UK is on the brink of a triple-dip recession and refuses to lower interest rates or increase their asset purchase program. The Euro zone had a negative GDP for 2012, -0.6% for Q4, the worst m/m since 2009, achieving a technical double-dip recession. Expectations are for another negative this year. Recent February PMI’s were all below 50 except for Germany. Even Germany posted a -0.6% GDP for Q4 2012.
EUROPE STILL STRUGGLING
In fact, Euro zone unemployment grows every day, currently an all-time high of 11.9%. The difference between Europe’s strongest economy Germany, and it’s second strongest France, widens each month. Many forget, Draghi cannot implement OMT (outright monetary transactions) unless the country that needs it, asks for it. OMT has not been implemented and the manufacturing data proves this. Until he does, it’s merely just a promise. Many also forget, as reminded by Italy, that the people of Europe did not vote for these austerity measures that German PM Merkel has forced upon them. Italy’s economy has only worsened, and now there is an anti-austerity movement that scares much of Europe.
Remember Cyprus and Greece? Cyprus is down almost -25% in the last three weeks and Greece is down about -10% in the last two weeks. Cyprus and Greece appear to be good friends, as they hold much of each other’s abominable debt. Cyprus needs a bailout by the end of March to avoid a default. They need roughly 17B Euros to save the country, or roughly 100% of annual GDP output. Will they ever be able to pay it back? Will they have to leave the Euro? What about their banks’ money laundering scandal? The Troika wants them to privatize some of their financial institutions, downsize them, and force haircuts on some depositors. This would be unprecedented in the Euro and could easily cause a panic. This could potentially mean a flight of capital as depositors worry if their money is safe. Their Finance Minister Sarris said these suggestions are “a stupid idea” that would be catastrophic for Cyprus and for the Eurozone.
TRIGGERING A STOCK MARKET CORRECTION
What likely happens to spark this correction is when the market frustrates all participants except Bulls are basking in their glory. Yes free markets are skewed. But no dynamical system can be taken out of balance for an extended period of time, without finding its balance again. If bears get killed in a climatic blow-off top, and the market takes the elevator ride down, what will fuel the rally? When there are no more stops to be had, and no one on the other side of the trade, down is the direction the market takes.
KEY LEVELS
I am lucky on Twitter to be able to follow some great market timers and technical analysts. Their analysis tells us that this top is likely at 1550 – 1570 SPX. This marks the previous 2007 closing high of 1565, the 2011 converging wedge, the DeMark daily, weekly, and monthly trend factor level of 1567, the February inverted head and shoulders’ calculated target of 1565, and the 1565/70 zone where two key Fibonacci extensions lay. This is quite a powerful concoction with potentially serious consequences. However, this does not necessarily imply that markets cannot do what they want and go higher.
= = =
What do intermarket trends show for stocks? Read Rinaldi’s feature story here.
