Market Needs Robust Economic Rebound
SUMMARY:
The stock market has already discounted an economic rebound from the winter slump, but needs better numbers to justify a surge from current levels.
Recent reports on the economy have been positive, but not dramatic enough to justify a major extension of the surge.
Today’s ADP Employment report reflects an economy that is rebounding, but not robustly. Non-Farm payrolls rose 210,000 (Private sector + 179,000) in May, which is OK but not great. Mortgage purchase apps declined suggesting the housing sector is not yet contributing to the post winter rebound.
While another month may be needed to gain a meaningful grasp of the pace of the economic recovery, the Street may lose patience and sell down to the sleeping level, ergo a 3% – 4% correction.
TODAY:
The pre-open reaction of the stock-index futures to the ADP Employment report at 8:15 was slightly negative, but more economic data is forthcoming today, tomorrow and Friday.
The report of the PMI Services Index and ISM Non-Manufacturing Index at 10:00 may nudge the stock market one way or another, but for impact, I think the Employment Situation report Friday at 8:30 is the key.
Over the last 9 days the DJIA is up 2.3%, the S&P 500 3.3%.
Odds are increasing for a drop in the DJIA this week to 16,501 (S&P 500: 1,899; Nasdaq Comp.: 4,176.
Investor’s first read – Daily edge before the open
DJIA: 16,722
S&P 500: 1,924
Nasdaq Comp.:4,234
Russell 2000: 1,126
Wednesday, June 4, 2014 9:15 a.m.
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NOTE: I continue to run “Sell in May” and “Housing” for two reasons. One, this analysis is relevant and I add important content frequently. I get new readers, and I want them to have access to this insight.
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Sell in May and Go Away ??
So far this popular bromide has been misleading.
While May has offered a number of timely exits, I don’t buy the “stay away” part, clearly not until November.
Based on the market’s strength since May 21, it looks like my contrariness is being rewarded. The DJIA closed at 16,580 on April 30, has undergone two corrections but is now higher than on May 1.
Both of those corrections looked like the beginning of something, but turned out to be head-fakes.
Undoubtedly, more corrections will lead “sell in May” investors to want to pack it in until November. For a while they will believe they were right, that is, until another sharp rally raises doubts.
Essentially, it is the backend of the “Best Six Months”* to own stocks (November 1 to May 1). This is true, but as I have noted with the Best Six Months, a lot can happen in the interim.
This bromide can’t be taken as a “given.” Of the 26 years I studied a “top” occurred in May on 10 occasions ranging from May 1 to May 22. Two occurred in June and two in July. No meaningful top occurred in 12 of the years studied.
On far too many occasions over the last 26 years a May top was followed by a decline, but within months (well before Nov. 1) the market rallied sharply. I see it more as a trading opportunity – i.e. “Sell in May,” but be ready to buy back after a plunge.
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HOUSING:
The economy needs a contribution from the housing sector if it is going to gain major traction coming out of the winter slump.
Pending Home Sales rose 0.4 pct. in April vs. a gain of 3.4 pct. in March when it ended nine straight months of declines.
Inventories continue to drop along with falling mortgage rates, a combo that forces home prices upward, which should prompt a stampede to buy before available attractive homes are picked up. The problem, banks are not anxious to lend at such low rates and many buyers simply can’t qualify for mortgages.
Housing stocks got some buying two weeks ago which spilled over into last week when sellers stepped in to put a lid on further appreciation.
There is buying interest based on hopes for renewed interest in the industry, but the buyers don’t have the firepower to plow through overhead supply.
On Tuesday, the housing stocks below continued to consolidate recent positive action.
PARTIAL LIST :
Beazer Homes (BZH) $19.25
PulteCorp ($PHM): $19.69
Toll Brothers (TOL) : $36.22
KB Homes (KBH) : $16.45
DR Horton (DHI) : $23.74
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THIS WEEK’s ECONOMIC REPORTS:
Another big week for economic news. If it indicates the economy is charging out of its winter slump, money managers can expect to ramp up buying, assuming the outlook for corporate earnings will improve.
For detailed analysis of both the U.S. and Foreign economies along with charts, go to www.mam.econoday.com. Also included is an explanation of each indicator. If you want to know when the next Employment report or any other key report will be released that info is also there under “event release date.”
MONDAY:
PMI Mfg. Ix. (9:45): May up to 56.4 from 55.4 Apr. – New Orders solid 58.8
ISM Mfg. Ix. (10:00): May up to 55.4 (after correction of 53.2) vs 54.9 Apr. – New Orders up to 56.9 from 55.1)
Construction Spending (10:00): Up 0.2 pct. in Apr. vs. gain of 0.6 in Mar. Projection was for gain of 0.7 pct..
TUESDAY:
ICSC Goldman Store Sales (7:45) Jumped sharply 2.9 pct. in My 31 week vs. 4.2 pct. week before
Motor Vehicle Sales: Apr. light motor vehicles came in at a 16.0 million annual rate, vs. an annual rate of 16.5 million vehicles.
Factory Orders (10:00): Rose more than projected to +0.7 pct, unchanged from the prior month
Global Mfg. PMI (11:00): The index for May’s manufacturing PMI was 52.2 vs 51.9 in Apr..
WEDNESDAY:
MBA Mtg. Purchase Apps. (7:00): Declined 4.0 pct. in May 30 week; Year/year now down 25 pct.. Refi’s declined 3.0 pct.
ADP Employment Report (8:15): Non-Farm payrolls up 210,000 in May; 179,000 Private sector. Small business picks up.
Int’l Trade (8:30):
Productivity/Costs (8:30):
PMI Services Ix.(10:00)
THURSDAY:
Jobless Claims (8:30):
Global Composite PMI 11:00):
Global Services PMI (11:00):
FRIDAY:
Employment Situation (8:30):
Consumer Credit (3:00):
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RECENT POSTS:
May 13, DJIA 16,695 Bulls in Wings – Market Needs a Spark
May 14 DJIA 16, 715 What Could Spark a Surge or Plunge
May 15 DJIA 16,613 Market Needs Help from Economy, or…
May 16 DJIA 16,446 Bulls Blinked – But Don’t Get Too Bearish
May 19 DJIA 16,491 Stock Market Getting Ready for a Move ?
May 20 DJIA 16,511 Bull Still Alive
May 21 DJIA 16,374 Market Needs Help from Fed and Economy
May 22 DJIA 16,533 Again – Stock Market Set for a Big Move
May 27 DJIA 16,606 Market to Key on Week’s Economic Reports
May 28 DJIA 16,675 Stock Market Needs a Catalyst
May 29 DJIA 16,663 European Monetary Ease June 5 – a Catalyst ?
May 30 DJIA 16,698 A “Teaser” Market Capable of Big Moves Either Way
June 2 DJIA 16,717 Decision Time for Stocks ?
June 3 DJIA 16,743 Economy “Must” Accelerate, or….
*Bloomberg
**Stock Trader’s Almanac
A Game-On Analysis, LLC publication
George Brooks
“Investor’s first read – a daily edge before the open”
Investor’s first read, is a Game-On Analysis,LLC publication for which George Brooks is sole owner, manager and writer. Neither Game-On Analysis, LLC, nor George Brooks is registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. References to specific securities should not be construed as particularized investment advice or as recommendations that you or any investors purchase or sell these securities on their own account. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.
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