TODAY:
The market took a hit yesterday when Fed chief Janet Yellen said its stimulus program could end this fall and benchmark interest rates could rise six months later.
She also said the Fed was abandoning its threshold target of an unemployment rate of 6.5% for qualitative analysis of a broad range of data, including labor market conditions, inflation expectations and financial markets.
The Fed’s new target interest rate would be 1% at year-end 2015 and 2.25% at year-end 2016.
It also announced another $10 billion taper to$55 billion.
The Street must have known the Fed’s taper program would end later this year unless the economy tanks, AND that interest rates will rise within a year, or so. That’s a given.
The 6.5% threshold for the unemployment rate was also expected. But to hear it from Yellen was reality for those disillusioned that QE would last indefinitely.
Stock and bond markets will now have to find a comfort level that adjusts to this timetable.
There is reason for another plunge in prices, based on fears that a lot has changed.
Some comfort can be gained by the fact the Fed would not take its position if the underlying strength I the economy wasn’t great enough to support additional taper.
Near-term risk is DJIA 16,075 (S&P 500: 1,844)
Resistance starts DJIA: 16,310 (S&P 500: 1,868)
Investor’s first read– a daily edge before the open
DJIA: 16,222
S&P 500: 1,860
Nasdaq Comp.: 4,307
Russell 2000: 1,195
Thursday, March 20, 2014, 9:14 a.m.
SUMMARY:
Today is a big day for economic indicators (see below “This Weeks Economic Reports”). While we may have to wait another month before economic reports emerge from severe weather distortion, the Street isn’t likely to wait for the reports.
Undoubtedly, a break in the winter weather will boost consumer optimism resulting in a surge of retail spending. This may be enough to shake loose some of corporate America’s stash of cash resulting in plant and equipment spending, even a new hire or two.
If the break in weather doesn’t prompt a rebound, the stock market is in for a correction. However, odds favor a rebound, a big one.
Last week New York Fed president Bill Dudley said he believes severe winter weather has shaved a full percentage point off the nation’s GDP in Q1, Beyond that, Dudley is optimistic since there will be less drag from federal spending cuts, improved household finances, and corporations that are awash in cash.
EUROPEAN ECONOMIES:
Manufacturing output , new orders and exports are up for the eighth consecutive month, suggesting its recovery is real, though not yet robust. Our economy has
scratched and clawed its way out of a horrendous recession without help from Europe. Obviously, a recovery there stands to accelerate our recovery here.
RUSSIA:
On March 21, Russian lawmakers will consider legislation allowing it to incorporate areas in other countries where residents want to secede in face of a dysfunctional central government.
Russian nationalism is running high in Crimea and it can spread to other parts of Ukraine even countries that were once satellites to Russian control.
This suggest to me a risk of civil wars breaking out in countries where the Russian language is spoken.
For now this represents an uncertainty for investors, but that could change for the worse, and there is little the West can do about it. No one wants to fight a land war next door to Russia, and Mr. Putin knows it.
Sanctions are about the only deterrent the West has, but Russia has cards to play other than military, since it has economic ties to Europe, especially Germany.
This is not over, be forewarned.
TECHNICAL ANALYSIS EACH OF 30 DOW STOCKS:
At key junctures, I technically analyze each of the 30 Dow Jones industrials for a reasonable near-term downside and a more extreme downside, as well as a near-term upside potential. I note the price for each, add them up and divide by the DJIA divisor (0.1557159) and arrive what the DJIA would be if each of the 30 stocks hit my targets.
As of Thursday’s close I concluded a reasonable near-term downside for the DJIA was 15,900, a more severe near-term downside would be 15,625. The near-term upside would be 16,511. That’s all assuming the overall news environment doesn’t change.
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HOUSING STOCKS – Rally Failure but watch closely
As spring approaches, the Street will be dissecting every morsel of economic data in search of how much of the recent slowdown in the economy is attributable to severe weather.
A logical place to snoop is the housing industry and stocks since they should firm up before the industry stats confirm expectations.
On February 17, I began tracking the following housing industry stocks reasoning that buying by pros more in-the-know than I would give a heads-up on a general rebound in the economy when a break in the weather prompts consumers to emerge from the warmth of their homes.
If these stocks rose in face of bad news, it stands to reason the severe weather was masking underlying strength. If the stocks plunged it would be confirmation the weakness was real.
The group got its first piece of good news on February 26 when January New Home Sales were reported to have jumped 9.0%. Housing stocks rallied sharply for eight days then gave it all back when the market sold off sharply,
Housing stock prices stabilized last week then jumped sharply Wednesday after February Starts rose 7.7% vs. a decline of 4.6% when KB Homes earnings beat projections for Q1 coming in At $0.12 vs. a loss of $0.16 a share.
Selected Stocks:
Beazer Homes(BZH: Friday, Feb. 14 – $21.26): Wednesday’s close: $20.56
PulteCorp(PHM: Friday, Feb 14: -$20.02): Wednesday’s close: $19.61
Toll Brothers (TOL: Friday, Feb. 14 – $37.79): Wednesday’s close: $36.49
KB Homes(KBH: Friday Feb. – $19.03):Wednesday’s close: $18.72
DR Horton(DHI: Friday, Feb. 14- $23.62): Wednesday’s close: $22.99
CONCLUSION: Strength in the above housing stocks, the second time in a month suggests the Street wants to pounce, it just needs an opening.
Their rally yesterday was cut short by Fed chief Janet Yellen’s comments in her 2:30 press conference that interest rates can be expected to rise when the Fed’s taper ends in the fall. Another jump in housing stock prices would indicate confidence that this crucial sector will continue to benefit, even, lead the economic recovery.
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THIS WEEK’s ECONOMIC REPORTS:
The economic calendar features important reports reflecting trends in manufacturing and housing, as well as the big picture, the Leading Indicators.
These reports may still be adversely impacted by severe weather conditions.
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:
Empire State Mfg Ix. (8:30): Up slightly in Feb. to 5.61 from 4.48; New Orders were 3.13 vs. minus 0.21 in Jan.
Industrial Production (9:15): Rebounded sharply 0.8 pct. in Feb. after a 0.2 pct decline in Jan. Manufacturing led the charge with a 0.8 pct. gain after a 0.9 pct. loss in January.
Housing Market Ix. 10:00): Failed to rebound significantly, the index advanced one-point to 47 vs. 46 in Feb..
TUESDAY:
FOMC meeting begins, ends Wednesday
ICSC Goldman Store Sales (7:45):Same store sales at major retail chains rose 0.7 pct. in the Mar. 15 week. Y/Y is 1.5 pct.
Consumer Price Ix. (8:30): Prices rose 0.1 pct. in Feb. vs. a gain of 0.1 pct. in Jan.
Housing Starts (8:30): Feb. Housing Starts were up down 0.2 pct. in Feb. vs. an 11.2 pct. drop in January. However, Permits were up 7.7 pct. vs. a drop of 4.6 pct. in Jan..
WEDNESDAY:
MBA Purchase Apps (7:00): Mortgage app. Activity continues soft down 0.1 pct fro both mortgages and refis for the week ended Mar. 14.
FOMC announcements (2:00 p.m.):
Pres Conf. Fed chair Yellen: (2:30 p.m.):
THURSDAY:
Jobless Claims (8:30): Rose 5,000 to 320,000 for Mar.15 week.
Philly Fed Svy (10:00):
Exiting Home Sales (10:00):
Leading Indicators (10:00):
FRIDAY:
Quadruple Witching Day
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RECENT POSTS:
Feb 28 DJIA 16,272 March Setting Stage for Spring Rally.
Mar 3 DJIA 16,321 Russian Bear Providing American Bull an Opportunity
Mar 4 DJIA 16,168 Crisis Almost Over – Easy Does it on Opening Prices
Mar 5 DJIA 16, 395 Street Reaching for Risk – Sneaky Strong
Mar 6 DJIA 16, 360 Selective – Stock Pickers’ Market
Mar 7 DJIA 16,421 Pivotal Day in the Market
Mar 10 DJIA 16,452 Important Test for the Bulls Today
Mar 11 DJIA 16,418 Gold Due For a Play ?
Mar 12 DJIA 16,351 Crimea – How Big A Negative for Stocks ?
Mar 13 DJIA 16,340 Correction to Set Up An Opportunity
Mar 14 DJIA 16,108 Selling Climax Next Week ?
Mar 17 DJIA 16,065 Rally Failure Risk, But Trader’s Buy Looms
Mar 18 DJIA 16,247 Market Vigil – Economy and Russian Nationalism
Mar 19 DJIA 16,338 A Spring Break for the Economy ?
George Brooks
“Investor’s first read – an edge before the open”
*InvesTech Research – 406-862-7777 (www.investech.com) Truly one of the finest monthly market letters with a host of accurate economic and stock market indicators.
The writer of Investor’s first read, George Brooks, is not 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. Brooks may buy or sell stocks referred to herein.
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