Fed Day May Day
“… current policies come with a cost even as they act to magically float asset prices higher…, a bond and equity investor can choose to play with historically high risk to principal or quit the game and earn nothing." Bill Gross, PIMCO
There’s not much new to glean from Bill Gross’s observation. It’s the conundrum facing many investors as they try to understand, cope, and make investment decisions. Even for the most veteran of observers current monetary policies are viewed primarily as an experiment. Gross is saying what we’ve been saying for a long time. He has a bigger megaphone than us so we’ll give him his due. As a market trend-follower, it shouldn’t make a difference to us why markets rise even with our suspicions. We must go with the primary trend until something tells us its ending. Today that "something" lies in the monthly charts and it's telling us the bullish trend is reaching some level of exhaustion. As a result, our core equity positions have been reduced, and even some of these positions converted to trading positions. Overall, equity exposure away from income sectors has been much reduced.
This week is stuffed with plenty of economic data, earnings and central bank announcements. Wednesday began with the ADP Employment report, which missed, creating only 119K jobs when expectations were at 155K. Worse still, the prior March report was reduced to 131K from 158K. Inside the numbers, manufacturing jobs were quite weak (-10K). This was followed by the PMI Mfg Index coming in weaker at 52.1 vs 52 expected, and prior 54.6. Construction Spending fell to -1.7% vs 0.6% expected, and prior 1.5%. Finally, ISM Mfg Index came in also weak at 50.7 vs 51 expected, and prior 51.3. Obviously, taken together, the Fed should have plenty of data to allow for more QE.
The Fed’s announcement didn’t change much, even as those that must parse new language looking for something new found little. Key words, “modest”, “moderate”, “prepared to act” litter the announcement release meaning “nothing new here pal, so move along." The only item that might be something new was a little finger-pointing at congress and POTUS over fiscal issues that was tossed-in as cover for the Fed and their policies.
On Thursday, the ECB will make its policy announcements known within an even worse economic environment. Lowering interest rates there and/or expanding QE haven’t stemmed poor data but markets have still “magically” (to borrow Gross’s term) rallied recently.
Meanwhile, in China manufacturing also declined slightly, but slightly doesn’t cut it in this environment.
Earnings from index heavyweight Merck (MRK) disappointed as negative patent issues dominated and shares fell. Apple (AAPL) sold the first tranche of its $17 billion bond sale led by underwriter Goldman Sachs. Once that was out of the way, Goldman Sachs then reduced revenue projections for the company. (Yes, those Chinese Walls between underwriters and analysts worked well today, um sort of.)
Equity sectors leading the way lower included financials (XLF), small caps (IWM), regional banks (KRE), materials (XLB) homebuilders (ITB), energy (XLE) and miners (XME) to name a few. Overseas sectors also fell, especially in emerging markets (EEM), Brazil (EWZ), Russia (RSX), China (GXC) and even Australia (EWA).
Also doing poorly were most commodity sectors (DBC) as weak economic growth will lead to less demand. Leading the way lower was energy (USO) on demand concerns and higher inventories. Copper (JJC) also was hurt by China and U.S. economic data which is logical. The dollar (UUP) weakened and gold (GLD) was weak. Bonds (IEF), always the safe haven, rallied.
Volume was slightly elevated with selling and breadth per the WSJ was negative.
SPY 5 MINUTE
The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.
The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.
The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise.
Thursday yields more earnings, the ECB, Jobless Claims and Productivity & Costs.
Still looming is Friday’s Non-Farm Payrolls Report which is entertaining no matter the reading.
Let’s see what happens.