Investor’s first read – Brooksie’s edge before the open
Wednesday, June 6, 2012 9:08 a.m. ET
DJIA: 12,127.95
S&P 500: 1285.50
Nasdaq Comp.: 2778.11
Russell 2000: 746.09
On Monday and Tuesday, I alerted readers to expect the Fed and European leaders to make statements in an attempt to ease investor angst and head off a panic in Europe over the consequences of Greece exiting the euro and a further deterioration in its sovereign debt woes.
Efforts like this are welcome to investors who have had portfolios savaged by the recent 10% plunge in the stock market.
BUT statements without concrete action set into motion a series of false starts in the stock market with the biggest danger being that investors will be sucked in prematurely only to see stock prices reverse to the downside. I call it the “news whipsaw.”
I believe the market will trend sideways-to-down throughout the summer as it seeks a comfort level to adjust to news on our economy, out of Europe and an enormously divisive political campaign. Sharp rallies will be followed by sharp declines.
SOME POSITIVES:
May’s ISM Non-Manufacturing Index rose to 53.7 from 53.5. New orders increased to 55.5 from 53.5, but employment in the sector dropped to 50.8 from 54.2. Fourteen industries reported increased employment two stayed the same and two reduced employment.
My December 21, 2011 post, “Housing Turnaround = Wealth Effect Rebound = Economic Expansion” predicted that the housing market had turned the corner and would become a driver for our economic recovery rather than a drag. Taking a hit in the stock market between 2007 and early 2009 was devastating to one’s sense of security and well being, but for them to take a hit in the value of their home was too much to bear.
A study by Tobias Levkovich, Citigroup’s chief equity strategist confirms my position on housing.* Referring to National Association of Realtors’ stats on the change in the median price of single family homes, Levkovich points out that April jumped 7.6 percentage points above March and May jumped 10.4 percentage points over April. The increases were the steepest change since data was collected in 1969 and May’s increase was the biggest since 2005 when the housing boom was at its peak. His chart illustrates percent changes in the prices and his conclusions refer to changes in those numbers, ergo when he refers to percentage point changes, he is referring to a change in a rate of change. Check the 30-year chart for clarification at Bloomberg.com/political-economy.
TODAY: Both the DJIA and S&P 500 hit minor resistance levels yesterday and will now approach more formidable resistance at DJIA 12,298 (S&P 500: 1297). Without a major breakthrough here on the economy and abroad on debt issues, DJIA 12,430 and S&P 500: 1317 will be tough to beat.
This is now the kind of market investors find themselves driven to action by news releases. The whipsaw is a mood changer, cruel and ruthless in its unpredictability. It raises “grouch” levels at home, increases blood pressures and sleepless nights, and usually results in decreased portfolio values. If a sustainable recovery begins now, there will be time to make money in the market. Investors compelled to buy should consider nibbling at positions in stocks they want to own. That way, another downturn doesn’t hurt as much and more stock can be bought when the veracity of an upturn becomes more readable.
Facebook (FB) – Dipped below the upper limits of my 24 – 26 forecast and is now set for a bounce to 27.36. Risk of further drop still high without solid positive news.
ECONOMIC REPORTS: Stock prices have accelerated their decline in face of increasingly dour reports on the U.S. economy. Is this just another summer slump ?
Will this trigger QE3 by the Fed. ? What’s important about this week’s line up of reports is a lot of Federal Reserve brass is out there addressing the issues – hmmmm.
Monday:
Factory Orders (10p.m.) Booking orders dropped 0.6% in April after a revised decline of 2.1% in March.
Tuesday:
ISM Non-Manufacturing Rept (10p.m.) The ISM Index bounced to 53.7 in May from 53.5 in April. The New Orders Index registered a bigger increase posting 55.5 vs. 53.5 in April, however employment in the sector dropped to 50.8 from 54.2. Growth in activity, but a drop in employment.
Wednesday:
Productivity and Costs (8:30) Q1 business productivity slipped at an annual rate of 0.5% after 1 1.2% rise in the prior quarter. Hours worked increased at an annual rate of 3.2% vs. 2.4% in the prior quarter, however compensation slowed to 1.5% from 3.9% in Q4.
Beige Book (2p.m.) Produced two weeks ahead of Federal Open Market Committee meetings (FOMC), the book reports on the economic conditions in each of the 12 Federal Reserve districts. It CAN offer clues to future Fed policy changes.
Thursday:
Jobless Claims (8:30) Claims increased 10,000 in the May 26 week to 383,000 bringing the 4-week average to 374,500. Claims have been sliding down for well over 18 months.
Bloomberg Consumer Comfort Index (9:45) This Index results from a weekly survey of American views of the economy, their personal finances and buying intentions.
Friday:
International Trade (8:30) The trade gap widened to $51.8 billion in March from $45.4 Billion in February. Exports rose 2.9% after a 0.3% increase in February. The deficit in non-petroleum goods was a major contributor.
Wholesale Trade (10p.m.)Wholesale inventories rose 0.3% in March with sales up 0.5%, the inventory/sales ratio remained unchanged at 1.17.
George Brooks
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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.
