Economy "Must" Accelerate Sharply or......

George Brooks |

SUMMARY:

      With the stock market  at all-time highs it has already discounted a recovery from the damage the severe winter did to the economy.

       What is needed for a major extension of the intermittent rise in stock prices that started in early April is for the economy to charge out of its slump.

      Yesterday’s economic reports were positive, but not blow-outs.

      Both ISM and PMI reports  were encouraging (see below)

      While the modest 0.2% rise in Construction Spending  fell short of  forecasts for an increase of 0.7%, the Gallup US Consumer Spending Measure of  daily consumer spending spiked in May up sharply from April.  The survey is based  on 14,000  interviews over a month asking each day for an estimate  of the amount of money individuals spent the day before (excluding auto and household bills).

      The ICSC-Goldman survey of major retail chain stores was reported early this morning.  Sales for the May 31 week were up a robust 2.9% over the prior week (y/y up 3.1%).  

      Obviously, the big question the Street needs to know is, will the rebound in the economy justify the current level of stock prices, more importantly, will it justify higher prices ?

      So far, the flow of economic news is acceptable, which would justify a sideways trading range throughout the summer until September/October.

     If the Street saw a spastic economic recovery by now, I think the market would already be headed south in a hurry.  

      I think the Street is hanging tough just in case this economic recovery takes off, and especially if it is accompanied by a recovery abroad.

     

      Average  price/earnings ratios (P/E’s) over various periods of times are frequently used by bears in bull markets to justify the case for over-valuation, but the range of P/E’s has varied so much over the years, an average is merely a guestimate.

     An average can be skewed by the time period used.  P/E’s set before  the onset of heavy institutional dominance may not be as meaningful as those set after.

      What is an acceptable time period for an average P/E  - 100-years ? 50 years ? , 30 years ?   And does it include  a period where P/E’s hit an extreme high or low ?

TODAY:

      Look for a mixed open with a downward bias with the DJIA testing minor support at 16,696 (S&P 500: 1,917;  Nasdaq Comp.: 4,219).

      What happens there is important.   A correction of the 7-day rally that started May 21 would take the DJIA down to 16,560 (S&P 500: 1,896; Nasdaq Comp.: 4,195).

      A one-day reversal today to close strongly on the upside paves the way for a sharp extension of the rally underway. Tomorrow’s ADP employment report and Friday’s Employment Situation report are key.

Investor’s first readDaily edge before the open

DJIA:  16,743

S&P 500:  1,924

Nasdaq  Comp.:4,247

Russell 2000:    1,128

Tuesday,  June  3, 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 ??

   A popular jingle this time of the year for newsletters and journalistsMay has offered a number of timely exits, but 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 May22.  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 Monday, the housing stocks below continued to consolidate recent positive action.

    PARTIAL LIST :

Beazer Homes(BZH)   $19.37

PulteCorp(PHM) :  $19.56

Toll Brothers (TOL):  $36.20

KB Homes(KBH): : $16.49

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 towww.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)

Motor Vehicle Sales:

Factory Orders (10:00):

Global Mfg. PMI (11:00):

WEDNESDAY:

MBA Mtg. Purchase Apps. (7:00):

ADP Employment Report (8:15):

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 ?

*Bloomberg

**Stock Trader’s Almanac

 

A Game-On Analysis, , LLC publication

George  Brooks

“Investor’s first read – a daily edge before the open”

Brooks007read@aol.com

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.

 

 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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