Monday, June 28, 2010

Morning Update/ Market Thread 6/28

Good Morning,

It’s a flat Monday morning, do you know what your algos are up to?

The dollar is up slightly with the euro down. Bonds are higher (not conducive to stocks), oil and gold are both slightly lower. I think most people are looking at Europe and they are now hearing “austerity,” while they look at the U.S. and they still see our stimulus idiots shooting off at the mouth. This gives the dollar an excuse to correct, but the mechanical forces of deleveraging debt are very powerful. And just look at the psychology changing, our officials are now having a very tough time, just look at the pinch the states are in and now we have a million on extended unemployment who are going to be completely without soon. That’s no way to keep a revolution down!

The oil in the Gulf is getting stirred up by tropical storm Alex. Even though it’s looking like it’s going to land in northern Mexico, the low pressure spins counter-clockwise pushing the oil into shore along the Gulf region. The outer bands already have heavy rains and thunderstorms in the spill area. This helped to push oil higher on Friday and could be a factor moving forward.

A large part of the reason Friday did not turn into a rout was because the Russell Index was “rebalanced.” That is to say that they pulled out nonconforming stocks and replaced them with new companies. This is the cause of substitution bias and is why the stock indices rise, yet stocks themselves may not be. This creates a false appearance that stocks always rise – they most certainly do not, they have life cycles. It created heavy volume on Friday, but that volume bar should be ignored in my opinion.

Personal Income and Outlays for May was reported this morning. Personal Income rose .4% month over month, the same as the month prior, and less than consensus which was looking for .5%. This is pretty strong income growth and the core price index rose .2% when .1% was expected. Consumer spending rose .2% which was consensus, it is now up 4.9% year over year, but keep in mind that comparisons are still against a very weak time last May but will be getting tougher as we go from this point. Here’s Econoday:
The consumer sector got another boost with a jump in spending power in May. Consumer spending was sluggish but mainly related to a drop in gasoline prices. Personal income in May rose a solid 0.4 percent, following a 0.5 percent advance in April. Analysts had called for a 0.5 percent increase in personal income for the latest month. The key wages & salaries component gained 0.5 percent, matching April's improvement.

A jump in auto sales helped offset softness in gasoline and other subcomponents in nondurables. Overall, personal consumption rose a modest 0.2 percent, following no change in April. The May figure came in equaled the market forecast for a 0.2 percent increase. By components, PCEs were led by a 0.8 percent boost in durables-reflecting motor vehicle sales. But services also were robust with a 0.5 percent jump. Nondurables declined 0.9 percent with prices effects explaining most of the weakness. Still, nondurables slipped 0.2 percent in real terms.

Inflation was mixed in May. The headline PCE price index was flat in May as was also the case the prior month. The core rate, however, firmed to 0.2 percent from 0.1 percent in April.

Overall, the consumer sector is slowly gaining strength in terms of spending power. Purchases have been a little erratic due to off and on auto incentives and consumer caution in general. Overall, the consumer sector took one step forward in May, helping the recovery continue.

Blather. Nondurables down .9%, that’s what the real consumer is doing right there. Note how this was blamed on PRICE weakness – correct to point that out, but note how they usually fail to blame increases on money fluffiness – imports, for example, are expressed in dollars so one has to be careful to assume that imports are up just because the amount of money spent on them is up. Unfortunately we track most things in dollar terms, this is a misleading mistake especially when currencies are moving around a lot.

We’ll get Citizen Confidence tomorrow, but the large piece of economic data comes Friday with the June Employment report. Last was positive 430,000, the consensus is looking for negative 100,000 with the census workers going away. I’m not sure what’s priced into the market, that seems like a pretty negative expectation for the mainstream crowd. But instead of adding massive part time workers we will be subtracting approximately 240k, and with birth/death adjustments likely smaller, it could get that far negative or even more.

A lot of mainstream callers are looking for some bounce in equities here. July/August are typically more bullish months, but I don’t think this Head & Shoulders pattern has a couple months left in it and the wave count I’m using says declines are coming soon as wave 3 begins to more fully express itself. Last week was a very bearish week, fully engulfing on all the primary indices. Below is a weekly chart of the SPX showing this bearish engulfing candle, that’s not what you want to see if you’re bullish:

In the chart below I show the dollar (left) which is still hanging on above 85. If it drops below that level it could be in for further slide. The long bond (right) is continuing to break higher out of a triangular pennant and is about to set a new high. This is signaling that money is still flowing into perceived “safety,” and will eventually pressure stocks.

Of course we’re now end of month and end of quarter fun and games times, the levels to watch are still the same – overhead resistance in the 1090 area, then 1100ish. Support is 1070, and if we get below that we are likely headed to 1040. Monday mornings have that positive bias, let’s see what we get this afternoon. And for those with cycle awareness, we did have a full moon this weekend...

Warren Zevon - Werewolves of London: