Street Must Taper Out of Reliance on Fed Stimulus

George Brooks |

On balance, this week’s economic reports reflect an economy that is gradually gaining traction, even  one capable of  enabling the Fed  to begin tapering out of QE before year-end.

   The question here is, did stocks surge yesterday in response to expectations for the economy’s recovery, and a rebound in corporate earnings from a Q2 plateau,  or was it because the FOMC left things pretty much the same in its meeting this week ?

   So far, the stock market has risen primarily as a result of assurances from the Fed that its stimulus policy will continue.  At some point the Street  has to accept a Fed policy change in exchange for accelerating economic and earnings growth.

  It is the transition over from one to the other that poses the risk of a correction. That change is complicated by the fact the Street has become too dependent on  the Fed’s continued zero interest rate/QE policy, a kind of security blanket.

    Interest rates are already rising in anticipation of a Fed policy change.

    While a rise from historic lows was bound to happen, the issue here is, how much will they rise ?

   The iShares 20+ Year Treasury Bond ETF (TLT) plunged yesterday, the CBOE 10 Year Treasury Note Index (TNX), which moves in the same direction as interest rates, rose sharply.

   CONCLUSION:

   If the Street can make a reasonably smooth transition from its reliance on the security of Fed stimulus to the  acceptance of less Fed interaction in exchange for an accelerating economy, we have another leg in this bull market, a big leg.

   A difficult transition will result in a nasty correction.

   The charts look great – classic breakout stuff.  Be very, very careful about this one.

As stated numerous times, I don’t think a move up in stock prices, based solely on the Fed NOT changing a policy, that is destined to change,  is a good reason to buy other than selectively.  

Investor’s first readan edge before the open

DJIA:  15,628.02

S&P 500: 1,706.87

Nasdaq  Comp.: 3,675.74

Russell 2000:  1,059.88

Friday, August 2, 2013         (9:20 a.m.)

  

   TECHNICAL OBSERVATION – STOCKS:

Alert: I have successively accomplished my goal of  helping readers navigate through the plunges in both AAPL and FB and subsequent recoveries.  .I may soon drop coverage and either pick up other fallen angels, or begin the technical tracking of stocks on the move.

   Apple(AAPL: $456.67)

   A little profit taking after a one-month 18% surge is normal, but AAPL has a lot of momentum going for it.. Support is now $452 There was some resistance at $455.40, but  $457 looks like the key to $460 - $470.

Some saw-toothed, sideways action would be normal as AAPL digests its nice July move.

FACEBOOK (FB - $37.48)

FB couldn’t stay above its IPO price of $38  Wednesday, but it is up 39% in five days and some consolidation would be normal.  Could slip below $35 in a correction.  Profit takers and investors in the  IPO who held on as it tumbled to $17.55 may put a lid on it at $38.

.

I DO NOT OWN, NOR HAVE I EVER OWNED APPLE OR FB.

ECONOMY:

 

   Huge week for reports on the economy plus more insight on Fed policy coming out of the FOMC meetings Tuesday and Wednesday.

   HOME BUYER BUYING PANIC ?

Mortgage rates rising, home prices rising, inventories decreasing !!

   For a detailed account of past and current economic reports, including charts go to: mam.econoday.com

MONDAY:

Pending Home Sales Ix. (10:00)  Declined 0.4% in July to 110.9, but signed contracts are still up 10.9% y/y.

Dallas Fed. Mfg. Svy. (10:30) July’s index dropped to 4.4 from 6.5, but is still generally seen as positive.

TUESDAY:

ICSC Goldman Store Sales (7:45)   Declined 1.6 pct for the week ended 7/27 with

                       drop more in discretionary vs. staples

S&P Case-Shiller Home Price Ix. 9:00 – rose 12.17 pct  (May) y/y

Consumer Confidence (10:00)  Slipped to 80.3 in July  from 82.1 in June.

WEDNESDAY:

ADP Employment (8:15)  200,000 private sector jobs were created in July

GDP – Q2  (8:30)  Under the new revisions, Q2 rose at an annual rate of 1.7 pct. in spite of a drop in federal spending of 1.5 pct. GDP has undergone a major revision going back to 1929 so  expect some distortions. The revision will reflect a minor reduction in federal spending and debt as a percent of GDP.  Q2 estimates may lack relevence.

Employment Cost Ix.(8:30)  Proj.:  +0.4 pct Q2

Chicago PMI (9:45)   Rose to 52.3 in July from 51.6 in Jne

THURSDAY:

Jobless Claims (8:30)  Down 19,000 to 327,000 claims far below projections for

    345,000

PMI Mfg. Ix. (8:58)   July up to 53.7 from mid-months 53.2 vs.June’s 51.9

ISM Mfg Ix. (10:00)   July index up at 55.4 vs. June 50.9

Construction Spending (10:00)  July  down 0.6 pct. vs. projected +0.4 pct June

FRIDAY:

Employment Situation (8:30)  Nonfarm payroll +162,000 in July vs 188,000 June.  Unemployment rate 7.4 pct

Personal Income/Outlays 8:30)   Proj,: +0.4 pct June

Factory Orders (10:00)  Proj.: +2.3 pct June vs. +2.1 pct May

www.mam.econoday.com.

  George  Brooks

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

sensiblesleuth@gmail.com

……………………………………………..

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.

 

 

 

 

 

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