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 read– Daily 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.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
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.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
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.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
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
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
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):
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
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”
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.
