Markets lacked directional bias and exhibited very little volatility as tech and retail sector increase pressure on the overall stock market. Tech momentum levels are improving but remain overbought, while blue chips are increasingly vulnerable as result of weaker than expected retail sales.
Global Economy – Gains in European stocks were limited after Eurozone Mar industrial production unexpectedly declined.
Chinese stocks rallied after details of the new trade pact with the U.S were announced. The new trade deal would allow U.S. companies to ship liquefied natural gas to China and ends a ban on imports of U.S. beef. Stronger-than-expected China Mar aggregate financing also eased Chinese credit concerns and gave stocks a boost. Eurozone Mar industrial production unexpectedly fell -0.1% m/m, weaker than expectations of +0.3% m/m. China Apr new yuan loans rose 1.1 trillion yuan, stronger than expectations of 815 billion yuan. Apr aggregate financing rose 1.39 trillion yuan, stronger than expectations of 1.15 trillion yuan.
U.S. Economy – Americans stepped up their spending at auto dealers, hardware stores and e-commerce outlets as retail sales rebounded from two sluggish months. The Commerce Department said Friday that retail sales increased 0.4 percent in April from March. Sales ticked up just 0.1 percent in March and fell in February. The increase suggests that consumers are poised to spur faster growth in the April-June quarter after the economy barely expanded in the first three months of the year. Consumer spending — which also includes spending on services such as utilities — rose at its slowest pace in more than seven years in the first quarter.
Consumer prices rebounded moderately in April as energy prices climbed back up after a sharp decline in March. The Labor Department says consumer prices rose 0.2 percent after a 0.3 percent drop in March, which was the biggest fall in more than two years. Energy prices rose 1.1 percent after tumbling 3.2 percent the previous month. Core inflation, which excludes the volatile food and energy categories, rose 0.1 percent. Over the past 12 months, inflation is up 2.2 percent. Core prices have risen 1.9 percent.
The Federal Reserve tries to manage the economy so that annual increases in inflation are around 2 percent. After mostly lagging below that target since the 2007-2009 recession, inflation has accelerated recently with the unemployment rate falling to 4.4 percent and energy prices rebounding.
Retail Earnings – The earnings focus lately has been on the Retail sector, with J.C. Penney becoming the latest department store to follow the lead set by Macy’s, Kohl’s, and Nordstrom. These reports reconfirm what we have known for a while – that these operators needed literally to reinvent their businesses to effectively operate in an environment where consumers are steadily shifting their spending dollars to the online medium instead of visiting the physical store.
As of Friday, May 12th, we now have Q1 results from 24 of the 42 retailers in the S&P 500 index.
Total earnings for these 24 retailers are up +2.2% from the same period last year on +4.6% higher revenues, with 58.3% beating EPS estimates and 54.2% beating revenue estimates.
As of Friday, May 12th, we have Q1 results from 454 S&P 500 members that combined account for 92.5% of the index’s total market capitalization. Total earnings for these companies are up +13.9% from the same period last year on +7.9% higher revenues,with 72.2% beating EPS estimates and 66.1% beating revenue estimates. The proportion of companies beating both EPS and revenue estimates is 51.8%.
Market Sentiment – Bonds are higher due to increased uncertainty around President Trumps decision to fire FBI director Comey. Furthermore, large retails earnings are lower than expected.
This is causing stocks to weaken and increase accumulation in bonds, which typically rise during stock market uncertainties.
Technically, bonds are not above the 50 day line and I’m expecting slightly more upside, till the main trend comes into play and pushes interest rates higher, which will cause BONDS to trade lower since bonds and interest rates trade inverse to each other. Expect slightly more upside, before the main trend begins to control the long bond and price reverts back lower.
Stock Market Analysis – As we expected over the past few sessions, the retail sector is becoming weaker once again. Keep in mind that consumer spending is responsible for over 70% of the GDP and when retail trades lower it impacts the overall market extensively. Price is now at the 50 day line and I’m expecting more downside over the near term, especially in light of continued negative numbers coming out of large chain store retailers in recent days.
Major retailers such as Macy’s, Nordroms and Kohls all came out with numbers below expectations. This is causing investors to increase selling pressure in the retail and consumer sector and creates more vulnerability in the overall stock market. Lastly and of major importance is the financial sector, which is now trading below the 50 day line for several days.
This tells us that economy is not growing at the expected rate over the past few months and with the U.S. dollar sinking further, the odds of seeing more downside in the near term is highly probable.
Financial stocks sagging will also impact the long bond and cause further trading action against the main trend.
Overall, tech is becoming weaker as we expected in the short term due to long term momentum levels becoming overbought over the last few weeks. With increased vulnerability in the overall market, the odds are strong that stocks will increase downside further, especially in light of retail and financial sector breaking lower. Tech was offsetting some of the loss to the overall market in recent weeks, but I believe that cycle is now over and unless blue chips come to the rescue over the next few sessions or a new catalyst develops, the odds of seeing increased downside pressure across most stocks is highly probable in the short term.
Volatility level remains low and global markets are stable once again. Don't expect major correction, but do expect minor downside to begin balancing individual sectors, which is desperately needed before the overall market trades higher once again.
Courtesy of Market Geeks