Tuesday, May 28, 2013

Market Analysis: US

First, let's review the economic news of the US from last week.  The trend from the numbers was very positive; none of the numbers released was negative.
The Good

The Chicago Fed's national activity index's three month moving average ticked up from -.05% to -.04%.  However, the month to month reading was negative, with three of four broad categories declining and no section making a positive contribution.  This is a "just barely good" level, especially considering the negative reading (and negative breadth of the underlying data) on the month to month basis.

The housing rebound continues: Existing home sales increased .6%.  As CR notes, the best part of this news is the low inventory level, which will lead to further upward pressure on prices.  New home sales increased 2.3%, with previous months readings revised upwards. with low inventory as well.  As with the existing home market, this is leading to an increase in prices.

Durable goods orders increased:  New orders for manufactured durable goods in April increased $7.2 billion or 3.3 percent to $222.6 billion, the U.S. Census Bureau announced today. This increase, up two of the last three months, followed a 5.9 percent March decrease. Excluding transportation, new orders increased 1.3 percent. Excluding defense, new orders increased 2.1 percent  Even without transportation numbers, we see an increase.

The Markit "flash" reading declined but was still positive: The Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™)1 fell for the second month running in May, falling to its lowest reading since last October. At 51.9, down marginally from April’s 52.1, the flash PMI index, which is based on around 85% of usual monthly replies, was consistent with a moderate improvement in overall manufacturing business conditions. 

As noted in the report, the one big negative reading came from the employment sub-series, which printed at a 7-month low.  However, this reading is relative, as it printed at a 52.2 level (with 50 being the level marking the line between expansion and contraction).

The Kansas City Fed manufacturing number was positive, but just barely:  The month-over-month composite index was 2 in May, up from -5 in both April and March (Tables 1 & 2, Chart). The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. The rise in production came from both durable and non-durable goods-producing plants, with the biggest increase coming from machinery and metals manufacturing. Other month-over-month indexes were mixed. The production index edged up from 1 to 5, and the shipments, new orders, and new orders for export indexes also rose. In contrast, the employment index fell from -3 to -7, while the order backlog index was unchanged. The raw materials inventory index rebounded from -17 to 0, and the finished goods inventory index moved slightly higher.

There has been an odd divergence between the ISM/Markit numbers and the regional numbers, with the former being strong and the second showing weakness to being just barely positive.

The Bad: 

None of the numbers issued was negative.

Last week we had testimony from Fed Chair Bernanke on the overall condition of the US economy.  Here's his summation:

Economic growth has continued at a moderate pace so far this year. Real gross domestic product (GDP) is estimated to have risen at an annual rate of 2-1/2 percent in the first quarter after increasing 1-3/4 percent during 2012. Economic growth in the first quarter was supported by continued expansion in demand by U.S. households and businesses, which more than offset the drag from declines in government spending, especially defense spending. 

Conditions in the job market have shown some improvement recently. The unemployment rate, at 7.5 percent in April, has declined more than 1/2 percentage point since last summer. Moreover, gains in total nonfarm payroll employment have averaged more than 200,000 jobs per month over the past six months, compared with average monthly gains of less than 140,000 during the prior six months. In all, payroll employment has now expanded by about 6 million jobs since its low point, and the unemployment rate has fallen 2-1/2 percentage points since its peak. 

Despite this improvement, the job market remains weak overall: The unemployment rate is still well above its longer-run normal level, rates of long-term unemployment are historically high, and the labor force participation rate has continued to move down. Moreover, nearly 8 million people are working part time even though they would prefer full-time work. High rates of unemployment and underemployment are extraordinarily costly: Not only do they impose hardships on the affected individuals and their families, they also damage the productive potential of the economy as a whole by eroding workers' skills and--particularly relevant during this commencement season--by preventing many young people from gaining workplace skills and experience in the first place. The loss of output and earnings associated with high unemployment also reduces government revenues and increases spending on income-support programs, thereby leading to larger budget deficits and higher levels of public debt than would otherwise occur. 

Consumer price inflation has been low. The price index for personal consumption expenditures rose only 1 percent over the 12 months ending in March, down from about 2-1/4 percent during the previous 12 months. This slow rate of inflation partly reflects recent declines in consumer energy prices, but price inflation for other consumer goods and services has also been subdued. Nevertheless, measures of longer-term inflation expectations have remained stable and continue to run in the narrow ranges seen over the past several years. Over the next few years, inflation appears likely to run at or below the 2 percent rate that the Federal Open Market Committee (FOMC) judges to be most consistent with the Federal Reserve's statutory mandate to foster maximum employment and stable prices. 

Over the nearly four years since the recovery began, the economy has been held back by a number of headwinds. Some of these headwinds have begun to dissipate recently, in part because of the Federal Reserve's highly accommodative monetary policy. Notably, the housing market has strengthened over the past year, supported by low mortgage rates and improved sentiment on the part of potential buyers. Increased housing activity is fostering job creation in construction and related industries, such as real estate brokerage and home furnishings, while higher home prices are bolstering household finances, which helps support the growth of private consumption.
Severe fiscal and financial strains in Europe, by weighing on U.S. exports and financial markets, have also restrained U.S. economic growth over the past couple of years. However, since last summer, financial conditions in the euro area have improved somewhat, which should help mitigate the economic slowdown there while also reducing the headwinds faced by the U.S. economy. Also, credit conditions in the United States have eased for some types of loans, as bank capital and asset quality have strengthened.

Let's turn to the US markets, starting with the SPYs:

The overall uptrend in the market is still very much intact.  While there is a trend line connecting the mi-November and early 2013 lows (the blue line), the better trend line is the one connecting the early 2013 and mid-April lows (the red line).  Last week's action led to some negative technical developments.  First, notice the sell-off on a volume spike, indicating there was a rash to traders looking to get out.  Prices are now below the 10 day EMA and are using the 20 day EMA for technical support.  The MACD is about to give a sell-signal as well.

Given last week's price action, a sell-off the the 159-160 level (the mid-April highs) seems more likely now.

The 60-minute chart shows the price action in more detail.  Notice the rally from April 21 to May 21, with last week's price action breaking the trend.  Also note the 159 price level is not only a price high, it is also a Fib level on the 60-minute chart, adding gravity to that level.

Despite the continued ups and downs of the treasury market, the IEFS are still in a trading range bound by ~105 at the lower end and 107.75-108.5 at the top end.  With the Fed still buying bonds in the open market, there is little hope for a drop in this market.

Despite several efforts to move through the 21.5 level, prices found support there.  Starting in early February, we see a rally as prices moved to the Fib mid-levels during March and April, then moved through resistance to move to the 23 price area.  Prices moved lower last week, finding support in the 22.7 area.