MorningWord 4/8/15: A Lack of Conviction

by Dan April 8, 2015 9:34 am • Commentary

Yesterday I noted how odd it is at this stage of the economic recovery here in the U.S. that markets still cheer bad economic data (the idea being it pushes potential rate hikes further [read below).  But I would also say that Monday’s gains, and yesterday’s late afternoon reversal to the downside all smack of low volume movement, and most importantly lack of conviction by both buyers and sellers.

With the Fed Minutes due out today I suspect we see light volumes prior, and possibly some small move afterwards. But I suspect the release will not be a large market mover given the exposure we have had to Fed Governors and the Chair since the March 18th meeting.

So it comes down to the earnings reports that officially get underway this evening. Alcoa (tonight) is not likely to shed too much light on much of anything, but next week’s slew of reports will set the tone for equity returns for Q2.

As for yesterday, the weakness in homebuilders and autos was notable, with GM down 2.5% and LEN and TOL also down 2.5%.

I would also note that despite FDX’s gains of 2.7% following yesterday’s buyout news of European operator TNT, the transports continue to struggle, down 5.5% on the year. And having not confirmed any new highs in the market since late November, the Dow Theorists are out in full force on this one.

Banks stocks continue to tread water with an uncertain rate environment and regulation constricting the sort of risk taking that has lead to profit growth in times past.  The XLF is down 2% ytd.  Next week we will get earnings from 8 of the top 10 holdings in the XLF.

The Tech sector strength is something to keep an eye on, as it seems entirely tied to Apple as many large cap components (CSCO, INTC, MSFT & ORCL) are all down on the year.

Biotech stocks, despite stabilizing yesterday are still down 8% from what looked like a blow-off top last month,  but remain the best performing sector in the S&P in 2015.

Industrial stocks appear to be teetering, as most have massive exposure to the strength of the dollar, and will rely on emerging markets for growth, this sector is down on the year.

Oh, and the U.S. consumer is humming along, as the Consumer Discretionary group is up 5% ytd. But let’s see what Q2 guidance brings, and the potential for a string of worse than expected jobs reports.

Staples, meh. Just look at KO and PG. Stay clear.  Utilities, disgusting. What are you willing to pay for yield and no growth? Material sector is fine, chemicals, have a ball, but what happens if oil goes back up and the benefit of lower input costs is gone?

Obviously I am looking at this as glass half empty here, but I just don’t see the value proposition for committing new capital to stocks here, I suspect you will get a shot to buy all your favs 5 to 10% lower in the coming months.

We have added some single stock long biased positions in the last few weeks, while also digging in on some short biased trades in sectors like tech, staples and homebuilders.




MorningWord 4/7/15: Bubble Gum

I’ll keep this short and sweet. Yesterday, the market began with early weakness on the heels of Friday’s much worse than expected March Jobs data. About 15 minutes into the trading day those losses were erased and the reversal continued for the next few hours with the S&P 500, at one point, up about 1% on the day. That kind of action will ultimately be remembered as atextbook move for this bull market. You know the letters, say them with me, B…T…F…D!!!  (buy the ‘fargin’ dip).

The reversal in and of itself doesn’t really bug me. At this stage of the game if you are pressing down 1% openings then you probably want to reconsider your future in trading the markets. But I do find the reason for the reversal curious.  Investors are cheering the fact that the slowdown in hiring (slowest since December 2013) could mark a negative turn in the economic recovery in the U.S. making interest rate increases less likely in the near future. In what kind of bizarro investment world do we live in where that sort of data is met with billions of dollars in market cap gains??

The talk of investment bubbles seems to have died down a bit in 2015, especially as Q1 was essentially flat from a performance perspective here in the U.S. But maybe the most prominent bubbles right now in the market are the ones taking up space in investor’s complacent heads.