Before we look ahead to this busy week's data, let us comment on yet another 'teflon' week in the broader U.S. market. I had opined last week that the markets were reaching points that in Non QE environments were reaching some extreme overbought levels. However, in QE or "pre QE" i.e. the 2 months ahead of an official announcement environments, they were stretched and corrections from those levels of overbought were more hit or miss. While the markets did not pull back, they did not advance – it was essentially an unchanged week. Now markets can work overbought conditions either by time or price (or both). So we'll mark last week as 'by price'.
This morning we have some index weakness due to the usual suspects, namely some hoopla about Greece – I would not expect that to last too long. A bit more worrisome is an increase in Portuguese bond rates seen last week, which thus far have been ignored. Not that Portugal is much more material than Greece, but we are back to the domino effect if that continues. Of course everything less than 3 years is now "super awesome" due to the ECB's LTRO. (don't you love acronyms?) Also contributing this morning is the refusal of China to relax reserve requirements now that celebrations over the holiday are over. I was not aware this was the demand of the day, but this is the danger of investing in an era where central banks are expected to do speculator's bidding, and much of our stock pricing is based on central bank actions.
Investors will be looking at the lows of last week to hold, that is roughly 1306 from last Thursday. A break of that level could finally lead to a more purposeful type of selling. With all the gaps of the past month, there are now gaps all over the index charts (not seen in the S&P 500 chart, but the SPY equivalent, and NASDAQ) That said, betting on that outcome the past few weeks has not been kind to those who have tried.
On the positive side the intermediate term technical outlook has improved materially since the beginning of the year, and stripping out the indexes completely, there is a lot of positive action in individual names. Also, the leadership has finally moved back to a healthier set of names. So we have conflicting currents – a near term stretched market, with intermediate term improvement. Of course none of this has to do with the broader economy which can change the views of market participants quickly – recall, ECRI still has a recession call waiting out there.
Outside of broad market talk, we have another heavy week of earnings – the last of the bulk of S&P 500 companies coming through, and then we begin this week and next a host of more interesting mid sized and smaller companies.
This week is also the one week of very heavy market moving economic data – monthly employment, Chinese and European PMIs, U.S. ISMs, etc. Rather than focusing so much on each number, we want to see what the market even wants. Does it perversely want weaker data to encourage ever more central bank easing? (recall the market celebrated last month's weak Chinese data since it supposedly meant more easing) Or do we celebrate better data, knowing the Fed most likely will QE us to the moon no matter what the data is? No one really knows until after the fact. But as news "improves" expectations should go up, which can lead to more disappointment (if the actual news is what people care about, rather than simply focusing on liquidity injections by central banks).
Here are the main reports of the week:
Tuesday: Chicago PMI – expectation 63.0 vs last month's 62.5
Tuesday night: Chinese PMI & European PMI
Wednesday: ADP Employment- expectation 172K vs last month's 325K; ISM Manufacturing – expectation 54.5 vs last month's 53.9
Thursday: Bernanke speaks in front of the House
Friday: Monthly Employment data – expectation of 135K vs last month's 200K. (recall there were over 40K "courier" jobs in last month's number, which should be "fired" this month, i.e. extra UPS, Fedex workers to help with holiday shipping) – unemployment rate to hold steady at 8.5%; ISM Non Manufacturing – expectation 53.3 vs last month's 52.6.
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