Three things are driving stock prices:
-Growing suspicion that corporate earnings won’t be as bad as expected and may even be surprisingly good.
-Increasing evidence that the economy is NOT tanking and may be picking up. Just this morning, September Housing Starts were reported up 15% vs. August’s gain of 4.1%. Permits were up 11.6%.
-The stock market has crossed the threshold of the “Best Six Months” for owning stocks (November 1 to May 1). This six month period has outperformed the six months (May 1 to October 31) by a wide margin for decades.* This seasonality spawned the “Sell in May, and Go Away” adage. These things work, not every time, but OFTEN.
The housing market is clearly improving. It led the plunge into the Great Recession/Bear Market in 2007 – 2009. The home is the biggest single investment most people take on in life. When house prices nose dived during the Great Recession, so did the “wealth effect,” one’s perception of their net worth. That adversely impacted the economy – people felt poorer or outright poor and slashed spending.
With house prices rebounding sharply, they will soon feel their net worth is also on the rebound and spend more aggressively. Corporations feeding this born-again monster will scramble to accommodate new demand, spend and hire.
Investor’s first read – an edge before the market opens
DJIA: 13,551.78
S&P 500: 1454.92
Nasdaq Comp.: 3101.17
Russell 2000: 835.44
(Wednesday, October 17, 2012 (9:13 a.m.)
September Retail Sales and the Empire State Manufacturing numbers came in above projections; Business Inventories are lower relative to sales, a good omen for manufacturing.
The Bloomberg Economic Surprise Index and the Citigroup Economic Surprise Index indicate the economy is growing better than economists’ expectations.
Q3 EARNINGS:
Corporate earnings for Q3 are not shaping up as bad as projected, though the better reports tend to be released early in the reporting period.
Nevertheless, the stock market is telling us not to sweat it.
If the economy proves to be stabilizing more than expected, a meaningful downswing is averted.
FISCAL CLIFF:
What’s next in surprises? How about defusing the fiscal cliff time bomb!
The press has sunk its talons into this one. I even saw a parallel drawn to the sky diver who plunged 24 miles to earth over the weekend. He landed safely, the press suggests otherwise for the fiscal cliff.
This is juicy stuff for the press. If Congress fails to resolve the spending/tax issue by December 31, the sequester kicks in forcing automatic spending cuts exceeding $500 billion at a time the Bush-era tax cuts expire raising taxes across the board. I expect Congress to do something to avoid a plunge over the cliff. Of immediate concern is, will a plan be presented before the election?
Too risky?
Yes, but that’s my point. No one expects either President Obama or Gov. Romney to breach the issue. Romney would be the logical one to do it, since his party’s Tea Party has been the “decider” of if and when something will be done. With their verbal “support,” he could offer a solution, close enough to November 6 that his plan could not be countered.
Such an event would positively impact stocks, since it raises hopes that the fiscal cliff won’t continue to impede consumer and corporate sentiments. Angst about the cliff has contributed to a slowdown in global economies this year.
Congress has some wiggle room, and may find a way to postpone the decisions into 2013, but there again you have an extension of “uncertainty” – bad for the economy.
ECONOMY: BIG week !
MONDAY:
Retail Sales (8:30) – Up 1.1% in September after an upwardly revised gain of 1.2% in August. “Core” retail sales (excl auto, gas, building mat’ls) was ahead 0.9%
Empire State Mfg Svy (8:30) – bounced back in September to minus 6.16 from minus 10.41, ahead of projections.
Business Inventories (10:00) – Inventories rose at a slower rate in August suggesting sales may be chewing away at stockpiles, a good omen for a pickup in manufacturing.
TUESDAY:
Consumer Price Index (8:30) – Rose 0.6% in September after a like gain in August. The CPI excluding food and energy was up only 0.1%. Oil spiked 5.6% after a drop of 0.3% in July.
Industrial Production (9:15) – Rebounded 0.4% in September after a drop of 1.4% in August. Capacity utilization increased to 78.3% from 78.0.
Housing Market Index (10:00) – Up to 41 from 40, the HMIreached a 6-year high in an early October report.
WEDNESDAY:
Housing Starts (8:30) – Rose 15% in September after a gain of 4.1% in August. Current pace is 872 million units, up 29.1% from a year ago.
THURSDAY:
Jobless Claims (8:30) –Dropped 30,000 in the October 6 week to 339,000 bringing the 4-week average down 11,500 to 364,000. Possible distortion here, we will see Thursday when we get revised numbers.
Philadelphia Fed Svy (10:00) –Improved to a minus 1.9 in September from minus 7.1 in August. New orders were positive.
Leading Indicators (10:00) –Dropped 0.1 % for the 3rd contraction in 5 months. A decline in ISM new orders had the greatest impact.
FRIDAY:
Existing Home Sales (10:00) – Jumped 7.8% in August to an annual rate of 4.82 million – all regions participating.
FACEBOOK (FB – $19.75):
Today: NO CHANGE ! FB is trying to stabilize above $19.50. Stock has attracted some buying, but buyers must get more aggressive to turn it up here. A move above$20 on increased volume is needed. Needs some buyers now or it will slip lower. Pattern is weak.
I don’t own, nor have I ever owned FB. Generally, I don’t recommend or comment on individual stocks. I started covering FB technically after its IPO because on May 21, I felt at $34 it was very vulnerable in face of all the misunderstanding and hype. I warned of a drop to $24-26, which it did shortly thereafter. Following a rally back into the 30s, FB dropped into the low 20s where on August 2, I forecast a low of $16.88. On September 4, it hit $17.55, its low since its IPO at $38.
George Brooks
*Stock Trader’s Almanac: This is a “must own” publication, loaded with daily, weekly, monthly savvy. It is “the source” for strategies, seasonalities, recurring events, useful stats. Published annually, I have used it every year since 1968. Nothing compares !
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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. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.
