Morning Market Analysis

Very briefly, yesterday's price action rallied the long end of the treasury curve about 1%.  However, all this did was to rally prices within a consolidation range.  We saw a general sell-off in Europe as a result of the GDP data.  Finally, gold is still trading in a range, telling us that uncertainty and/or fear of instability isn't spiking.

Yesterday, the long end of the treasury curve rallied strongly in reaction to the poor GDP showing from the EU.  Te above 60 minute charts of the TLH (top chart) and TLT (bottom chart) show that both ETFs have been trading in a range for the entire month of February.  Yesterdays gain -- while strong -- wasn't strong enough to break this consolidation.

The French market -- whose underlying GDP was poor in the latest EU GDP report -- has fallen below the top Fib fan.  Now the 50 day EMA is the most likely level of support.  This would also put this ETF right about the 61.8% Fib level.

I've included the Italian (top chart) and Spanish market (bottom chart) to show that yesterday's EU GDP news hit the entire region's ETFs.

The gold ETF continues to trade between the 150 and 175 level.  This tells us that investors and traders don't see inflation around the corner.  You could also argue that gold is a hedge against uncertainty, so the drop since the end of last summer indicates that traders are less concerned about uncertainty. 

Is Europe Really Bottoming? Pt. II, France

I wrote this before today's release of the EU's GDP report.  Suffice it to day, France did not bode well in that release, either.

Let's now turn to France -- which accounts for about 21% of the total EU economy -- starting with the Markit Manufacturing and Service surveys:

Operating conditions in the French manufacturing sector worsened during January. The headline Purchasing Managers’ Index® (PMI®) – a seasonally adjusted index designed to measure the performance of the manufacturing economy – dropped from 44.6 in December to 42.9, its lowest reading in four months. The PMI was dragged lower by all five of its components; output, new orders, employment and stocks of purchases all contracted at accelerated rates while suppliers’ delivery times lengthened to a less marked degree than one month previously.

Key to the weaker performance of the manufacturing sector was a steep decrease in the level of new orders placed with French manufacturers. The rate of decline in new work was the fastest since March 2009. Panellists commented that heightened economic uncertainty had resulted in a tough business climate during the latest survey period. Data signalled that domestic demand was again the key source of weakness, as total new orders fell at a considerably sharper rate than export sales.

And we have the services number:

The seasonally adjusted final Markit France Services Business Activity Index – which is based on a single question asking respondents to report on the actual change in business activity at their companies compared with one month ago – slipped to 43.6 in January from 45.2 in December. The latest reading was indicative of a marked rate of contraction that was the sharpest for almost four years. Panellists attributed lower output to difficult economic conditions and declining levels of new business. 

Business activity across the French private sector as a whole decreased at a steep rate in January. At 42.7, down from 44.6 in December, the seasonally adjusted final Markit France Composite Output Index – which covers the combined manufacturing and service sectors – signalled the steepest rate of decline since March 2009.

Here are the charts:

Neither of the respective reports or charts have any good economic news.  The French manufacturing sector (top chart) has been declining for the better part of a year, bringing down overall GDP growth.  As the accompanying write-up demonstrates, the slowdown is broad-based, hitting all five components of the index.  Most importantly, the real issue is the domestic slowdown caused by slowing growth and overall uncertainty.

The service sector chart (bottom chart) has the exact same problem as the manufacturing chart -- an overall rate of decline for the better part of the last year.  Also note there is not upward trend in either chart.

Let's now turn to the French GDP figures:

The above chart shows overall French GDP growth along with the percentage contribution from various parts of GDP.  Pay particular attention to the line that shows overall growth.  In 2010 and the 1Q11 we see strong growth.  However, since then overall growth has stalled, printing either slightly positive or slightly negative.

 

The above chart puts the GDP data into clearer view.  First, the overall growth rate at the macro level has stalled right around 0% for four quarters.  While that's not a technical recession, it certainly is not the sign of an economy that is doing well.  The underlying data shows that a variety of factors have contributed to the overall growth slowdown over the last four quarters.  Inventory adjustments slowed the economy in 4Q11 and 2Q12.  The first quarter of 2012 saw a big hit to net investment, while foreign trade slowed the economy for two quarters.

The above data shows no promise for the French economy going forward.  Instead, we see an economy struggling to print positive growth.

 

Latest EU GDP Readings Confirm: The Region Is Doing Poorly

The top graphs shows that on a quarter to quarter basis, the region has been performing poorly for the last five quarters.  The graph above shows that 9 countries have been contracting on a percentage change from the preceding year and three additional countries have been contracting for three quarters on the same basis.

There is nothing good in these numbers.

Link

An encouraging initial jobless claims report

- by New Deal democrat

This morning the Labor Department reported initial jobless claims fell to 341,000. The 4 week moving average rose slightly to 352,500.

Any given weekly report can be noise, and must be taken with several grains of salt. This one, however, is particularly encouraging. Up until 4 months ago, there had not been any post-recession report below 350,000. But in the last 10 weeks, 4 of the reports have come in under 350,000, with a new post-recession low of 330,000. When we got the very good reports in January, there were warnings that they were post-Christmas distortions. The same cannot be said of this week's number.

So this week's number is particularly encouraging, even though it is only one week's data, because it appears to confirm that we have moved into a new range of about 330,000 on the low side and 375,000 on the high side (red in the graph below), vs. last year's pre-Sandy range of 350,000 to 400,000 (blue):



This isn't quite what we would get in a full expansion, which would be roughly from the 290,000 to 335,000 range, but it's getting pretty close. Now if Washington can pretty please not screw it all up. {sigh} ....

Morning Market Analysis

The 60 minute SPU chart (top chart) shows that prices consolidated at the beginning of the month (Feb. 108), then broke through topside resistance on Feb. 9.  Prices rallied a bit from there but then sold-off a bit.  The 151 price level provides near-term support.  The daily chart (lower chart) shows the uptrend is still intact.  Prices are using the EMAs for technical support and all EMAs are still moving higher.  However, the MACD is now drifting lower.

The lumber market is clearly benefitting from the turnaround in the housing market.  Prices were contained by the 320 level until late last fall when they rallied through that level.  Prices next consolidated between the 320 and 340 level before breaking out at the beginning of December.  Prices rallied, retreated and then rallied again to the current level around 395.

The long end of the yield curve is barely hanging on to technical support.  The TLHs are right at the 131 level, while the TLTs are trading right at the 116 level.  A meaningful break below either level would be bullish for the equity markets.

The Russian market broke trend at the end of January and has been trading between the 30 and 31 level since.  While momentum has decreased, the CMF reading indicates that money is flowing into the market.  Also of importance is that prices didn't drop much below the 20 day EMA.  This tells us there's some price support right above 30.

The Australian market broke an uptrend at the beginning of February and consolidated between the 26 and 26.5 levels.  However, the technicals indicate a sell-off might be in order.  The CF is declining and the MACD has given a sell signal. 

Is the Payroll Tax Increase Hitting Retail Sales?

From the Census:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for January, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $416.6 billion, an increase of 0.1 percent (±0.5%)* from the previous month and 4.4 percent (±0.7%) above January 2012. Total sales for the November 2012 through January
2013 period were up 4.5 percent (±0.5%) from the same period a year ago. The November to December 2012 percent change was unrevised from +0.5 percent (±0.3%).

Retail trade sales were up 0.1 percent (±0.5%)* from December 2012 and 4.1 percent (±0.8%) above last year. Nonstore retailers were up 15.7 percent (±2.3%) from January 2012 and auto and other motor vehicle dealers were up 9.4 percent (±2.3%) from last year.

Let's take a quick look at the data:

Overall, we see weak retail sales growth in the nacro-data above.  While the year over year numbers are good, the month to month is concerning.  Some of the lack of increase could be the result of the Christmas season pulling into December, leading to a better Christmas with a bit of a January hangover.  Also note the decrease in auto sales -- not at all encouraging. 

Note the bigger increases came from bread and butter retail: grocery stores increased .6%, GM increased 1.1%.  Conversely, electronic stores only increased .2%, and furniture stores sales decreased .2%. 

In January we had the payroll tax increase start to bite.  We could also be seeing the beginning effects of that development taking hold.

NDD here with a few comments:

The general reaction to this morning's retail sales report for January seems to be a sigh of relief, as the number was positive +0.1% month over month. In fact, real, inflation adjusted retail sales probably declined slightly, but we won't know for another week.

Although the BLS does seasonally adjust the retail sales number, January CPI tends to be slightly higher than in most other months, running at an average of +0.3% over the last 10 years. If this year is in line with that average, then real retail sales will be down -0.2% for January. Typically the CPI report and the retail sales report are released within a day or two of each other, but this month we will have to wait until next Thursday for the CPI report.

If you want to see more optimistic data on retail sales, take a look at this graph of Gallup's daily consumer spending report since January 1, 2012:



According to this report, on a YoY basis, consumer spending report has been on a tear since the beginning of December, reaching levels not seen since December 2008 - and staying there. While in 2012 consumer spending declined to a low of $59 on a 14 day rolling basis on February 7, 2012, this year it only fell as low as $74 on January 27. It has since increased back to $88 on February 11, $28 higher YoY for the previous 14 day period. It's been suggested that high income earners who got year end bonuses to beat the tax rate increases are out spending the money, and that certainly looks like a reasonable surmise.

Morning Market Analysis

 

Japan consolidated from the beginning of the year to early February.  Since then, prices have moved a bit higher, which has pulled the EMAs along for the ride.  However, notice the light volume over the last two trading days and the weakening (though still positive) nature of the CMF.  The overall chart is weakening a bit.

The Indian market couldn't get above resistance at the 62 area, so has started to move lower.  Prices are now below the trend line and are right at the 50 day EMA.  Also note the weakening of the MACD and CMF.  

The Transports have spiked since the beginning of the year.  They rallied to near the end of the month in January, sold off a touch and then tried to continue moving higher.  But note the smaller candles as the market has moved higher accompanied by a decrease in the MACD.  Prices seem to have stalled right about the 105 handle.  Finally, yesterday we see a big volume spike with no price follow-through. 

Oil broke trend at the beginning of February, moved lower to the 20 day EMA and has started to move higher over the last two trading sessions.  The 98 price level has a fair amount of resistance for the chart.  Also note the weak MACD reading. 

The housing ETF rose through January, sold-off in a disciplined manner at the end of January, but had a really big day yesterday, printing a massive bar on strong volume. 

And finally, consider this hypothetical SPY chart from ETF Corner:

Japanese Consumer Confidence Makes Sharp Increase

The chart above shows big jumps since the new government started making waves.  Whether it continues is anybody's guess at this point.  However, so far the government's moves are being seen positively by the Japanese population.

Link to the data.

Is the EU Really Healing? Part 1 Germany

From the last EU press conference announcing the latest interest rate policy:

Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP declined by 0.1%, quarter on quarter, in the third quarter of 2012, following a contraction of 0.2% in the second quarter. Available data continue to signal further weakness in activity in the fourth quarter and at the beginning of 2013. This weakness reflects the adverse impact of low consumer and investor sentiment on domestic expenditure, as well as subdued foreign demand. However, financial market sentiment has improved and the latest survey indicators confirm earlier evidence of a stabilisation in business and consumer confidence, albeit at low levels. Later in 2013 a gradual recovery should start, with domestic demand being supported by our accommodative monetary policy stance, the improvement in financial market confidence and reduced fragmentation, and export growth benefiting from a strengthening of global demand. 

It's standard issue for a central banker in the middle of a recession or slow economy to say that further down the road a gradual recovery will take place, largely as the effects of the central bank's policy announcement take hold.  But, let's look at the overall data to see if that's what is really happening underneath the surface.

First, I've written a fair mount on the EU over the last month or so.  Overall bank funding is improving, but consumer confidence and business confidence are still weak.  An argument could be made that each is stabilizing, but they are both still at low levels.  And from a GDP perspective, I noted the following in December:

That means that of 27 countries in the EU 27, a little under half are in a technical recession. A summation of the preceding points would be that the EU is just not doing that well.

However, let's try and read the tea leaves of the four largest EU economies: Germany, France, Italy and Spain, starting with Germany.

Germany is by far the largest economy in the EU area, accounting for about 27% of the EUs size.  As such, it's performance alone can have a disproportionate impact on the EU's growth prospects.

From the latest German Markit Manufacturing and Services sector releases we get the following:

Germany’s manufacturing sector started 2013 with improved trends in output and new business levels, contrasting with the declines seen through much of last year. The return to growth in production and new work helped lift the final seasonally adjusted Markit/BME Germany Purchasing Managers’ Index® (PMI®) – a composite indicator designed to provide a single-figure snapshot of the performance of the manufacturing economy – to 49.8 in January, from 46.0 during December. This was only fractionally below the neutral 50.0 value, with an acceleration in job shedding the main factor weighing on the headline PMI in the latest survey period. The index has now posted below 50.0 in each of the past 11 months, but the latest reading signalled

January data pointed to resurgent growth across the German service sector, with business activity and new order volumes both rising at the fastest rate since June 2011. Adjusted for seasonal influences, the final Markit Germany Services Business Activity Index picked up from 52.0 in December to 55.7 in January. The index highlighted back-to-back monthly rises in business activity for the first time since May 2012. Moreover, the latest reading was well above its long-run average (52.9) and signalled a robust pace of output expansion that was the fastest for 19 months. The upturn in business activity at the start of 2013 reflected growth in five of the six sub-sectors monitored by the survey, with Post & Telecommunications the exception.

Let's look at the accompanying charts:

The Manufacturing chart (top chart) shows that this index has been negative for most of 2012.  However it appears to have bottomed around mid-year and is currently rebounding higher, printing just below positive in their latest print.  Overall production in the last report rebounded from a recent sharp decline, and exports -- while still being negative -- improved a bit.

The real standout is the surge in the service PMI (bottom chart).  This index went negative for the past part of 2012, but has since rebounded strongly.  The latest report noted the primary reason for this surge was a big bump in new business, caused by improved customer confidence.  This move was in contrast to the 8 months of new order decline that had occurred in 2012.

Let's turn to German GDP, which was recently released by the Bundesbank:

First please click for a larger image. 

A few points stand out in the data.  First, note the general rate of overall slowdown in the data.  In the first few quarters of 2011 we see annual prints of 5.2% and 3.1%.  By the last few quarters of last year, we're seeing prints of .5% and .4%.  While these numbers are still positive, they are just barely so.  The big reason for the slowdown is the drop in production and construction, which contracted in the last two quarters of last year.  But also note the slowing of retail purchases and inventory depletion.  The bottom line is several key components of the data slowed.  But also note the primary reason for the slowdown -- production -- is probably related to the overall slowing of the EU economy and Germany's export juggernaut.  This means that a healing EU would lead to a growing Germany.

Conclusion: Because of its size Germany has the ability to pull the EU out of its recent slow prints.  The above data point to a brightening picture for this economy, but we're not out of the woods yet.  Ideally, we'd need a new more months of strong manufacturing and service numbers.  

Morning Market Analysis: Europe Correcting.

The above charts are all from Europe -- Spain (top chart), Italy (second from top), emerging Europe (middle chart), France (second from bottom) and Germany (bottom).  All have broken trend and are now correcting.  All now have weaker MACDs.  In all, the shorter EMAs (10 and 20) are declining and the 10 is below the 20 day EMA in two chart, with the other three close to printing the cross over.  Prices are below the 10 and 20 day EMA in all charts. Also note the drop in the CMF in the Spanish and Italian markets (top two charts). 

Spain and Italy (top two charts) have already moved through the 61.8% Fib level and are working down to the 50%.   The French market (second from the bottom) is already at the top Fib fan and the German market (bottom) still has to make contact with a Fib level.

So far, this has been an orderly correction.  However, it's difficult to see the US market continuing higher at the same rate with European markets moving lower.  

The BRiCs Little Inflation and Growth Problem

Consider the following charts of the year over year percentage change in inflation from Russia, Brazil and India:

All three economies have an inflation rate that is running hot on an annual percentage change basis.  Russia's (top chart) dropped to a decent 3.6% in June of 2012.  But since then it has been rising.  While it appeared to plateau in he 6.5-6.6 area towards the end of last year, inflation edged higher in the latest report to 7.1%.  Brazilian inflation (middle chart) bottomed at 4.92% in July of last year, but has since been moving consistently higher, currently sitting at 6.15%.  It recently printed its highest level in 8 years.  And India's inflation has been stubbornly sitting at just over 7% for the last year. 

Consider the inflation information in conjunction with the GDP data below:

All three countries are seeing a drop in the GDP growth rates.

The problem each of these countries faces is that to encourage growth their respective central banks would lower interest rates.  But their respectively high inflation rates make that a non-starter, forcing them ti either find other ways to encourage growth or to accept slower economic growth.

Morning Market Analysis, or It's the "Invest That Massive Dividend You Received To Avoid the Fiscal Cliff Tax Increase" Rally

I have to admit that for the last few weeks I have been utterly perplexed by the markets.  While I understand that markets are not required to always make sense, I still like to have some understanding about what is actually going on.

The problem has been the huge split between the fundamental and technical backdrop.  While the market technicals were bullish (with the exception of breadth indicators) the economic backdrop has not been.  I highlighted this divergence here.  With the exception of China, all regions of the world are either in recession (EU, UK and Japan), suffering from slow growth (the US) or slowing growth (Russian, India and Brazil).  And while the US is in a situation where it could break-out economically thanks to car sales, housing and manufacturing, Washington is doing it's very best to thwart growth with the payroll tax hike and sequester.  Simply put, these are not macro fact patterns that support new highs on equity indexes.  And while traders keep their eyes glued to the screens during a rally, looking for a viable entry point, at some point the lack of strong fundamentals has to come into play.

And then I read this:

He also says the source of January inflows [into the equity markets] may simply be the flurry of bonuses and special dividends paid out in the US ahead of this year’s tax rises. He describes this as “a flood of demand from income that would have normally occurred in January, February and March that needs a home”.

And this:

January is historically a strong month for inflows as investors make their annual contributions to IRAs and year-end bonuses are invested. This year there was a bulge in such funds as more bonuses and dividends were paid out before the "fiscal cliff" tax hikes expected at the start of 2013. Let's have a closer look at the data:

(1) Wages and salaries in personal income popped by 0.6% during December. Odds are this number will be revised upwards given that individual income tax receipts collected by the US Treasury jumped 19.8% y/y (the most since October 2011), with the 12-month average up 1.9% m/m.

(2) Dividends in personal income spiked from $782 billion (saar) during November to $1.1 trillion during December. Data available through December show that reinvested dividends in equity mutual funds rose to a record $77.0 billion last year, with a record $46.6 billion during December alone.

In addition, consider this chart from Dr. Ed's Blog:

At the end of last year, there was a flurry of dividend payments to avert the effects of the fiscal cliff.  As the blue line shows, this action literally flooded the market with money that has to go somewhere.  So it's currently going into equities.

But at some point, that money will run out.  When this happens, the fundamentals will come back in play.

So, we're in the middle of a liquidity fueled rally with too many dollars chasing too few stocks, leading to the increase in share prices.

With that in mind, let's take a look at last week's SPY action:

The daily chart shows that the overall bullish trend is intact.  Prices are still moving higher after consolidating last week.  All the EMAs are rising and prices are using the EMAs as technical support.  But notice the MACD which has given a sell signal.

Looking deeper, we see the 60 minute chart shows that prices spent last week consolidating between 150 and 151.5 with a rising base.  The 15 minute chart shows that prices did not rally all day Friday, but instead moved higher at the open and then remained there for the remainder of the trading session.  Both charts do have positive momentum and volume indicators.

In addition, consider these breadth indicators:

Both the S&P 500 and NASDAQ indexes have a large percentage of stocks trading over the 200 day EMA -- an overbought sign.

Above is a chart of the last three years price action for both the SPYs and the percent of stocks trading above the 200 day EMA.  I've boxed the areas where a peak in the percent above 200 occurs.  Notice that in all three we see a slowing rise (2010-2011) or outright peak (beginning of 2012).

And finally, consider this from Marketwatch:

Corporate insiders are now selling their companies’ stock at a rate not seen since late last July.
 .....
Consider a ratio calculated by Argus Research of the number of shares insiders have sold in the open market to the number that they have bought. Last week, according to the latest issue of Argus’ service, the Vickers Weekly Insider Report, this sell-to-buy ratio stood at 5.77-to-1. And among insiders at companies listed on the New York Stock Exchange, this ratio was even more lopsided at 8.2-to-1.

Making these recent readings even more worrisome, according to Argus Research, is that they came on markedly stepped-up activity among corporate insiders. This increases our confidence that the ratio accurately reflects prevailing sentiment among a broad cross-section of the insiders.

In fact, Vickers is so alarmed by recent insider trends that this week it is selling big chunks of its two model portfolios and putting the proceeds in cash. After the sales, its “Insider Model Portfolio” will be nearly 30% in cash and its “Risk Model Portfolio” will be more than 60% in cash.

So, to sum up my points above, the current rally is technical in nature.  A bunch of new money flooded the market -- money that had to go somewhere.  But at the same time, the economic fundamentals just don't support this move higher.  Finally, the underlying breadth indicators are weak and insiders are selling into the rally.

This is not a strong bull market that will continue for a long time, barring a a change in the underlying fundamental.