WHAT’S ON TAP?
Another huge week for the markets coming up. Another 18% of the S&P 500 will report earnings, but the shift will move from major market leaders to second tier companies. Very few of the reports will be major market movers like we’ve seen in recent weeks. I expect the impact of earnings to diminish substantially in the coming two weeks. This is one less log on the rally fire. The economics news will be front and center including the grand daddy of ‘em all, the NFP report on Friday.
- Monday: July ISM manufacturing survey, July construction spending, July auto sales
- Tuesday: June personal income and spending, June pending home sales
- Wednesday: July ISM services index, June factory orders, July ADP employment survey, weekly crude inventories
- Thursday: weekly initial jobless claims
- Friday: July unemployment and change in nonfarm payrolls, June consumer credit
I’ve turned neutral on the market here. The risk reward appears most unfavorable. Although I am not directly shorting the equity markets I do have a number of pseudo shorts via the currency and derivatives markets. My equity exposure has been cut to 0% at this point. I feel very comfortable with my Thursday sell near S&P 995 after the disturbing late day action on Thursday and Friday. They say the smart money transacts after 3PM and the smart money was selling both days. We’ll see if it materializes into real selling in the coming weeks. I am having trouble finding a new catalyst for the rally. Positive earnings and an all out economic recovery are largely being priced into stocks here. Sentiment is wildly positive in the near-term. All of this makes me less than excited about buying into the market at these levels.
Recent changes are great. Yours is my daily read. Keep up the good work.
TPC, what would be a nice feature is a search function to find and read a particular poster’s posts…..some guys here write some thought provoking material so i would be nice to find it in a flash
E,
Do you mean commenters?
-TPC
Mish is very critical re:employment numbers reliability:
http://globaleconomicanalysis.blogspot.com/2009/08/weekly-unemployment-claims-portend.html
TPC, Si commentators…
btw, what is “NLI”
TPC,
If selling does occur in coming weeks, what magnitude of a correction would you expect? How would you determine when the risk/reward relationship becomes favorable again?
—
We are in a unique time, but given the magnitude of the crisis, a 50% decline from the 2007 peak was certainly to be expected based on history. The speed with which it happened came as a surprise. Now the question can history be a guide to what may happen next?
There seems to be a general expectation that the S&P500 will rise to the mid 1000s over the summer and then will correct later in the year. I have heard this from very early in the rally and from various sources both bearish and bullish, economists, market commentators and technical analysts (including the author and some reader of this blob).
History seems to suggest that a retest retracing of 75%-80% of the rally off the ultimate low is typical. That happened in 1932 when the Dow bottomed near 41, almost doubled to 80 and then in early 1933 fell back to 50. There was the same dynamic in the other deep bear markets 1973-1974, 2001-2003. Those bear markets were all longer than the current one was if it ended in March, but except the Great Depression were less severe crises. Notably, no retest happened in 1982 (but the extremely low multiple at which the market bottomed and the sharply falling interest rates we a big tailwind for the market).
On the one hand, it seems that the overall rally is playing out as expected, on the other hand, if there is a general expectation that the market gets to 1,000 to 1,100 and then corrects, might that prevent it from happening?
There was an expectation on July 10 that a potential 10%-20% correction (more than just the 8%) or retest was underway (the more bullish said S&P500 850, the more bearish expected a retest to the mid-700s), but exactly the opposite happened. (At the time, valuations world-wide were in question, technical head and shoulders at the neckline on the S&P500, etc). Merideth Whitney and the better than expected earnings of some leading companies like Intel together with an increase in short positions, created the fuel to proper the market higher (initially via what appeared to be a short squeeze) and through the previous resistence at about S&P500 950. Even more interesting, major markets around the world which had been falling all seemed to reverse and march higher at the same time (Asia was down big on July 13 as the markets closed before the reversal in the US). The move higher almost seemed to have been orchastrated by an invisible hand. I find the world-wide correlation and the risk on / risk off trade to be truly unsettling.
On the other hand, now that bullishness is running high, might the correction (if and when it comes) be sharper than expected. As the market fell in February, there seemed to be universal agreement that the market would successfully retest the November lows, until it fell right through the lows and then right through 700. (There may have been a lot of pessimism about the banks at the time, but it seemed that optimism was running high that the lows would not be broken.)
Mish didn’t mention an important point in his analysis of unemployment. He mentioned nothing of the effect unpaid furlows of salaried employees of several days each month. Such furlows have become increasingly common and are not considered in the unemployment statistics, except hopefully in aggregate working hours.
Aggregate working hours of non-supervisory employees are down 8% since 2007 and are at approximately the level of 1998 (11 years ago), although they are still a bit higher than the lows reached in 2003 during the jobless recovery. At the same time the US Census estimates that the US population 18 years to 65 years old has increased 11.6% from July 1998 to July 2009. (The population from 18 to 65 is estimated to have increased 11.9%).
That implies that aggregate working hours relative to the adult population have fallen 10.3% from 1998 to 2009.
Real aggregate payroll of non-supervisory workers has increased 7.6% over the past 11 years. Population up 11.6%, real payrolls up 7.6%. That is progress for you.
Productivity improvement sure, but as a country we are standing still. If working hours remained constant with the same productivity improvement, output and wealth would be must greater.
Rob:
What’s your e-mail address?
D.
Dean,
I asked TPC to share it with you.
R.