U.S. stocks were mixed Friday as technology companies, which have led the market’s recent rally, began seeing minor selling pressure. Video game companies are slipping as Wall Street was disappointed by forecasts from GameStop. Banks are down and consumer-focused companies are rising. Stocks are still near record highs following a six-day winning streak.
Global Economy – European stocks are down to a 1-week low as German automakers slide after comments from President Trump. Volkswagen AG, Daimler-Benz and BMW are all down 1% after Der Spiegel reported that President Trump in a closed-door meeting with EU officials chided German automakers for selling too many vehicles in the U.S. saying that contributes to a huge German trade surplus that is hurting the U.S. economy and that “we are going to stop that.”
China’s Shanghai Composite erased early losses and climbed to a 3-week high on reports of state-sponsored buying of stocks. The yuan rose to a 4-month high against the dollar after at least two Chinese banks sold dollars in the offshore market. Speculation the PBOC is intervening in the forex market to prop up the yuan has led to short-covering after Moody’s earlier this week cut China’s sovereign debt rating.
U.S. Economy – The U.S. economy started 2017 out with a whimper, but it wasn’t quite as weak as first thought. The government revised up its January-March growth reading to a rate of 1.2 percent — better than an earlier estimate of 0.7 percent but well below President Donald Trump’s ambitious growth targets. Growth in the gross domestic product, the broadest measure of economic health, is down from a 2.1 percent annual growth rate in the fourth quarter and marks the weakest result in a year, the Commerce Department reported Friday. The upgrade to 1.2 percent reflected new-found strength in consumer spending, business investment and state and local government spending. Many economists believe growth in the current April-June quarter will rebound sharply to above 3 percent, helped by stronger consumer spending that reflects solid employment gains and an unemployment rate that has fallen to a decade low of 4.4 percent.
U.S. orders for long-lasting manufactured goods dropped in April for the first time in five months, and a key category that tracks business investment went nowhere for the second straight month.
The Commerce Department said Friday that durable goods orders fell 0.7 percent in April after rising 2.3 percent in March. The April downturn was the first since durable goods orders fell 4.6 percent in November. Despite the April drop, American manufacturing has bounced back in recent months from a slump early last year. Overall, American manufacturing has regained momentum after being hurt early last year and in late 2015 by cutbacks in the energy industry and a strong dollar that makes U.S. products pricier overseas.
Market Sentiment – Jun 10-year T-note prices are up +5.5 ticks on dovish comments from St. Louis Fed President Bullard who said the Fed is “very close” to where it needs to be on policy rate. St. Louis Fed President Bullard said the Fed is “very close” to where it needs to be on policy rate. He said he could be persuaded to do another rate increase at some point, but objects to the idea that the U.S. needs 200 bps of more normalization to get inflation near the Fed’s 2% target.
Technically, bonds could not take out the last swing high, even though GDP data was better than expected and volatility remains below historic high levels. One of the main reasons why the upside will be limited is because of the type of transparency we are seeing from the FED and because historically, bonds are near all time lows and pressure is building to increase rates in the near term.
I’m expecting price to revert back down to the 50 day line, unless there’s a major Global set back in the coming weeks.
Stock Market Analysis – Stocks are showing very little reaction to quarterly GDP data, since the numbers are not far out of line with estimates. VIX Index which measures market volatility remains near historic lows, which tells me that investors are not expecting major volatility or global turmoil in coming days. Expect to see VIX rise in the coming days, due to stocks reaching overbought levels, which usually cause VIX levels to rise. One factor helps volatility remain lower is lack of volatility or institutional sponsorship during summer months.
However, Global uncertainty remains the biggest cause of volume spikes in the stock market and if negative Geo political tension increases in coming weeks, which is more than likely, we will see VIX levels spike once again.
Looking at the overall stock market, the SPY and the Dow Jones are coming off overbought price levels in the short term, but more importantly, price is making higher highs, while 10 day RSI is making lower highs. Divergence between RSI and price tells me that price is rising too quickly in the short term and is overdue for a pullback.
I’m expecting the major indices to back away from all time highs and move down to the 50 day line in the short term time period. Market internals are pointing to overbought price and narrowing of momentum. Aside from overbought indices, weakness in several key blue chip sectors and narrowing of momentum, we are also seeing a slump in the small cap index.
Keep in mind, small cap stocks are more speculative than blue chips or even tech stocks and typically lead the market ahead of larger, institutional grade stocks. There’s much less market cap in Russell stocks which makes the index more reactive to aggressive buying as well as selling pressure.
Usually, when markets are near all time highs, small caps are leading ahead, but in the present case scenario the small caps failed to trade higher during the last upside in the stock market and that’s causing me to become increasingly bearish in the short term.
There’s very little upside catalyst in the U.S. markets at this time and I’m expecting corrective pressure to develop in the short term. Expect to see major indices near the 50 day line and few blue chip sectors move down below the 50 day line and head towards the 200 day average.
Keep your eye on retail and industrial stocks ans well as tech over the near term.
Courtesy of Market Geeks