Central bankers are blitzing the markets with all they have!
Market Roundup
It started yesterday when European Central Bank President Mario Draghi and his pals didn’t cut rates, but DID strongly hint they would act later this year. Among the options he put on the table: An extension of Euro-QE beyond its current expiration date of September 2016 … an expansion of the type and quantity of bonds the ECB will buy … or even a cut in interest rates deeper into negative territory. The bank’s deposit rate is currently minus-0.2%.
That caused the euro to plunge by two full cents against the U.S. dollar. It also lit a fire under the Dow Industrials — even as junk bonds barely budged, oil was basically unchanged, the Russell 2000 badly lagged and many key financial and health-care stocks languished.
|
|
| The Bank of China’s interest-rate cut helped ignite an early stock market rally. |
Then this morning, the People’s Bank of China added fuel to the fire. Specifically, the PBOC cut its one-year lending and one-year deposit rates by 25 basis points. It also cut the bank reserve requirement ratio by 50 basis points, theoretically freeing up banks to do more lending. That ignited another rally in stock futures.
So does this mean happy days are here again, and that asset prices will climb into the clouds? Is my call for an overall weakening trend in stocks, interspersed with very sharp, short-term bear market rallies, off base?
First, you have to ask why the ECB is taking even more steps just six months or so after it launched Euro-QE. The answer is pretty obvious: Because the program was an abject failure! It didn’t boost European growth, nor did it boost European inflation, with prices falling 0.1% in September.
Second, you have to ask how a further dollar rise would be positive. The surging dollar has helped crush revenue and profit at a wide swath of U.S. multinationals, not to mention put downward pressure on commodities and resource stocks. So any additional gains driven by a new round of euro depreciation will only make a bad problem worse.
| “So does this mean happy days are here again?” |
Third, this is China’s sixth interest-rate cut since November. None of the previous ones worked, obviously, as the economy just grew at a rate of 6.9% in the third quarter. That was the slowest “official” growth rate since the Great Recession year of 2009, and the real GDP gains are undoubtedly much lower once you strip out the statistical fudging China is well-known for.
Fourth, markets have come a long way in a short period of time … but simultaneously haven’t accomplished much at all. Consider: While the Dow Industrials have jumped 1,600 points in just a couple of weeks, they’re only back to where they were in August. If that’s all we can get out of a huge round of global policy easing, what does that say about the underlying problems facing markets and the economy overall?
Finally, every previous round of easing in the early and middle stages of the bull market prompted huge rallies in everything. This time around, we’re seeing huge divergences by asset class, sector, currency, and economy. That only serves to underscore the paradigm shift I’ve highlighted — that the law of diminishing returns is a major, new challenge for investors.
So sure, we’ve rallied more than I expected in the short term. And there are a small handful of stocks out there I still like, as I mentioned the other day. But I seriously doubt that another round of the same medicine that repeatedly failed in the past will push an incredibly old, divergent, and fundamentally challenged market back into bull territory.
Now, let me hand you the floor. Do you think the latest moves by the ECB and PBOC are game changers? Or are they just more of the same kinds of actions that haven’t worked in the past? Do you think this is an oversold rally, or the start of a move to new all-time highs in the indices? Are the problems in China worse or better than generally assumed, and what does that mean for the stock market outlook?
Here’s the Money and Markets website link — put it to good use this weekend and I’ll do my best to address your comments on Monday.
|
Are companies maximizing shareholder wealth in a wise fashion, or are executives just padding their pockets? Are stocks going to continue to rally, or are there warning signs out there that point toward renewed volatility ahead? Those were a few of the questions you tackled online in the past 24 hours.
Reader Regis said: “I think what Yum Brands (YUM) and Credit Suisse (CS) are doing are the beginnings of a long tragic condition that exists in the worldwide marketplace. I personally expect the condition to spread rather quickly over the next six months.”
Reader Steven added: “I get the impression that those who manage corporations do so for their own interests and take the shareholder and stakeholder along for the ride. The only way we ever know about the outcome of their decisions is the stock market’s response in the form of share prices. I know that it would be a bit much to ask for, but how about a greater focus upon fiduciary duty to the company, shareholders and stakeholders as stewards who are accountable rather than farmhands whose only job is to milk the (cash) cow?”
Reader Kirk also shared this perspective: “It’s been my experience after 30 years in corporate America that half of the publicly traded companies are run by executives that depend on fear rather than ideas and leadership, and the result is a ‘play it safe’ mentality that crushes innovation.
“My last 15 years were with a company that went through four mergers, countless reorganizations, and whose net effect was the destruction of $10 billion in value and Chapter 11. Nevertheless, the 3 CEOs that oversaw this train wreck (and their minions — they always have their ‘A Team’) walked away with millions. Shame on me for not getting out sooner.”
When it comes to the behavior of the market, Reader H.C.B. said: “Big European banks are in trouble and don’t know what to do. Who is next? Could it be that U.S. banks are eventually headed for the same troubles as Credit Suisse and Deutsche Bank, only with no ‘Plan B’? It sure is looking like we could be next.”
And Reader Jim added: “Another reader recently pointed out quite correctly that the market isn’t the economy. The stock market has certainly been juiced with free money, but I think you would have to admit that real economic growth is not all it should be.
“I do not think the U.S. economy is in very good shape at present. But I do think the macro situation has so deteriorated that none of the politicians can fix it, and both parties are responsible.”
Thanks for weighing in. Obviously, we’ve seen a bit more rally in the markets than even I anticipated. But additional easing measures are clearly doing next to nothing for the real economy, even as they’re juicing asset prices again. And even there, I would point out the “juicing” effect is less robust than what we’ve seen from past rounds of monetary steroids. That tells me my forecast of diminishing returns from QE is panning out.
Those are my views anyway. You may think differently, and that’s fine — let me hear about it at the website using this link.
|
We got a trifecta of genuinely strong technology sector earnings reports overnight, from the likes of Microsoft (MSFT), Amazon.com (AMZN), and Alphabet (GOOGL). The stocks are all extended on the charts, but investors reacted positively to the figures nonetheless.
You’d think that plunging commodity prices would enforce production discipline on producers around the world, and that their cutbacks would help fuel a future recovery. But as the Wall Street Journal noted today, many companies have gone on overproducing despite price declines.
Why? Because their costs are dropping sharply too, and because they still need to bring in cash to service debts. That could prolong the already-lengthy downturn.
The strongest hurricane in the history of recorded weather is closing in on the Mexican coast. The National Hurricane Center clocked winds of a whopping 200 miles per hour for Hurricane Patricia, and forecast landfall later today somewhere south of Puerto Vallarta. The storm will rapidly fall apart when it hits the mountains of Mexico, but its remnants will likely cause heavy rains and flooding over Texas in a couple days.
Republican representative Paul Ryan looks set to succeed John Boehner as Speaker of the House after securing a pair of endorsements. The Wisconsin legislator hasn’t sounded enthusiastic about the position, but appears to be taking the position for the greater good of the GOP.
Will commodity producers ever find religion and cut output? Is the latest batch of technology sector earnings enough to turn the market tide for good? Any thoughts on whether Ryan will make a better speaker and face of the Republican Party? Head over to the website and let me know.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 70 comments }
WTF is going on with the markets?! The Nasdaq back over 5000. These markets are so corrupt and manipulated there are no words for it. The .01% must be laughing their heads off as to how easy it is to juice the markets at will. I know I am in the minority, but I feel anyone profiting off these markets under these conditions are participating in an immoral system and are making money in a somewhat criminal manner. But that pretty much sums up success in the USA in this day and age.
i love sin. i’ll take all of this can get. my morals are still fully in tact.
Does not matter what the Conservatives do as they are toast for a very long time
You guys have this Democrat vrs. GOP thing all wrong. You are confusing Republicans with Conservatives. Republicans are intellectually bankrupt because they are NOT conservative. The majority of the American people are conservative and don’t feel the
Republicans represent their views so they boycott the elections. This explains the butt kicking Dems took in the last two mid term elections, and I mean a drubbing. Seventy per cent of State houses are controlled by local Republicans who are conservative. Local offices experienced similar landslides. The Republican Establishment is completely out of touch with its base, thus it’s unpopularity. Bush was awful, McCain was awful, Romney was awful and they let an inexperienced community organizer walk away with all the marbles. Ryan is just another establishment lackey like Boehner and will likewise fail. This explains the success of Trump and Carson. We didn’t want looney left wingers and we don’t want Liberal Republicans. The Tea Party formed because of this phenomena. The country is indeed changing but not your way or the Republicans. Jim
Conservatives win and the Ultra Wealthy win and people lose… Progressive Liberals win and the people win… Has ALWAYS been that way… It is NOT going to be “different” this time… Study history…
The Tea Party was a Republican plot to bring the tin hat loonies to the surface. Now it is eating the Republicans… Could not happen to a more deserving lot…
No conspiracy theories there! Jim
I have attended several Tea Party rallies, which I somehow assume you haven’t. They are are the most average ordinary middle class folks you can imagine. They are people who have never been involved on any political level and fear the Left Wing loonies are taking the country to,places we don’t want to go. They aren’t really a Party. The bought and paid for Media only show the few fringe idiots that show up. They are so frightened of the prospect of ordinary Americans getting politically involved they feel compelled to trash them. What’s radical about people who want less regulation and lower taxes? We are so saturated with misinformation I don’t see anyone can believe anything the Media tells us. Jim
Jim, I entirely agree with your view. And if you take anything the media says about an issue as being editorialized to the left, you will be better able to judge the truth.
america’s fed needs to tighten, rather than have countries ease like europe. tightening by the fed is a combined easing for the rest of the world’s currencies. too bad the fed missed its chance again in september. i doubt they’ll make that mistake again in december. gold respond favorably to easing by the fed, so imagine what tightening will do.
look for a pullback to the neckline of the inverted head & shoulders formation we’re in. called a bear trap and a great buying point in a correction.
Huh? What chart are you looking at?
any chart you like. a classic inverted head & shoulders formation is about complete in the s&p. the right shoulder is forming now. expect the usual bear trap (you do know what a bear trap is, right) before the correction ends. the bear trap is one last scary pullback that brings the bears out in full force, but is actually a great buying op. smart money will take advantage of the bear trap.
As Speaker of the House, Paul Ryan will be trying to pull together the radical conservative wing and the more liberal members of the Republican Party, not to mention the Democrat members of the House. The strain seems to have gotten to Boehner, causing his resignation. Ryan would be better off as a voice of liberal conservatism. A liberal conservative is one who is not blindly opposed to change, but wants to see proof that it should be beneficial, before adopting it.
Chuck,
I believe you mean the “Less Conservative” members of the GOP… “Liberal Conservative”? Now, THAT is a new term…… No such thing these days….. The days of selling out to the Conservative Ultra Wealthy (CUWs) at great cost to the average American is bringing the death knell of the GOP…
You are hopelessly obsolete. You are espousing a 20th century philosophy in the 21st century. The five septuagenarian has beens your party put on display at the debate is proof of that. Your party is a party worthy of the dinosaurs. The Washington Establishment that your party dominates is doomed to collapse under its own weight. We can’t afford it. Young innovative people with new ideas will pick up the pieces and this Democrat-Republican debate will be relegated to the history books where it belongs. America’s best days are ahead of it because the power will be returned to the People where it has always belonged. Jim
Jim,
The power is returning to the average citizen because the public has finally awaken to the fact that the quality of their lives has collapsed since the Republican Revolution since 1981…. the voters are throwing out the GOP and, once again, moving left… It is NOT going to be different this time… The GOP was, once again, done what they always do, sell out to the Ultra Wealthy and now the voters are responding with their opinions and votes despite the billions coming from the Ultra Wealthy to try to keep their minions in power… Good times are coming as the Democrats regain the power with the support of the average American, just like it did from 1932-1981…
The power is being concentrated in Washington D.C., much to our detriment. They even call themselves Czar. Statewide the Dems have been crushed in the last two elections. They are on the verge of becoming extinct. Wonderful places like Illinois tell the tale. They are broke. The GOP are indeed sellouts and they are also headed for the dustbin of history. I respectfully contend you are way behind the curve. The political landscape is changing so fast I don’t think we can really know what it’s going to look like. If the last seven years are good times, I pass. Jim
The Democrats have become almost communistic, and the Republicans trend toward fascism. There is no real middle ground of liberalism – no party that really represents a liberal viewpoint.
With each election, we seem to be going more and more from one extreme to the other. There is no real liberal middle ground, in the real meaning of liberalism.
Chuck, The truth is our nation was founded in the Liberal tradition. However, today’s Liberal bears absolutely no resemblance to the traditional Liberal. Liberty and free speech are mo longer cornerstones. The modern Liberal has given us a stifling political correctness. Jim
Chuck, you are regularly guilty of a very refreshing intellectual honesty. Jim
Which is the liberal part of Ryan’s politics. I just couldn’t find it.
The S&P has now broken above the 200 day Moving Average, and is only 76 points below its former high. It doesn’t seem to make sense, with all the negative news, but we could be on the way to Larry’s 31,000 in the Dow, without the sharper pullback he forecast. Gold stocks also are often up on days when the metal is down a bit. Maybe about $1100 is the worst we’ are going to see, not his $900. What’s that old saw about climbing a “wall of worry”?
watch for the bear trap, chuck. be ready to pull the trigger on a pullback to the neckline of the inverted head and shoulder. if look at the 2011 or pretty much any correction you’ll see the final pullback that’s called a bear trap. we should have one any day now, usually as soon as everyone let’s their guard down. dumb money is buying now because they feel they’re being left behind. smart money will buy the pullback when they sell at a loss.
Speaking of stock charts, this pattern we are in right now seems very much like about this same time of the year in 2007. It was along about then that the Fed unexpectedly “injected” their first batch of “liquidity” into “the system.” The markets went up like wild, just like the Draghi rally yesterday and the Chinese rate cut affect today….BUT, it turned out to be about the top of the rally, and the real blood-letting came about during the course of the next year.
So, based on that, 2016 MAY turn out to be a bear!!
A Robert, the ONLY thing that worked happened on March 9, 2009 under the Liberal Obama Administration (PPP) in coordination with the FED (QE)… Interesting that the Conservatives (You know, the so called “Business Party”) never figured that out, aye?
Of course the moves by ECB and PBOC are game changers; kicking cans down the road makes the pile of cans at the end of the road that much bigger and the holes in the cans that much worse.
This is a very difficult time to hold super amounts of cash, as you suggest, while the market continues to rally. The only sector going down is Utilities, and without a Fed rate rise, I can’t quite figure why my stocks keep dropping.
The projects are politically determined. The stimulus is not going in the right places.
That is because the GOP has only let the QE go to Wall Street (their big benefactors) and not Main Street in the form of a CCC public works program, which they have always opposed since 2009…
I would like to take this opportunity to urge Democratic Senators to support the Dark Act. Monsanto and the Republicans are trying to pull a fast one with regards to GMO. We have a right to know what’s in our food. Jim
Just another example of the GOP screwing the average American while rolling over to big business!… :( Thanks Jim…
Yep! Jim
Absolutely. Anything that is hushed up is crooked somewhere.
The markets largely work off of perception. When enough people notice historical trends and use them to predict the future, those indicators break. That’s why QE and “common wisdom” fail over time – too many people are using what they know to profit from a trend, which takes the wind out of the market.
It’s great to be one of the early ones to notice a market “tell”. But when everyone knows the tell, it ceases to be useful.
The only thing that always raises the market (in real terms) is expansion – more people working & participating, or greater total production. The rest is just perception.
The labor participation rate is down, and productivity per person barely gained, year to year.
Greed and fear run the markets. Foreign investors are no different. They are looking for a safe haven and profits too, Believe it or not the U.S is the best place to be right now. I see big dollars coming here. Blue chips, high end real estate, land, treasuries and metals. It has already begun with CVS(1589?) putting $ 400,000 into startups. This bull market will run into the early 2016 and then its doomsville…how deep I can’t even guess. I’m keeping my thumb on the shorts button at the first sign of decline.
I will be interested to hear your views on Europe and the migration crisis haveing seen it first hand
The market has been moving up parabolically. At some point–probably sooner than later–the fast money traders will pull the plug, sell their longs and short the market. I’m content to be mostly in cash and short duration high quality bonds. I sleep better at night.
Thank you !
i am very disappointed in your timing i have lost out on this rally because i took your poor advise,another dumb newsletter.
I was for Ryan until I heard that he is pro amnesty
Do I have a subscription? How do I access it? Madeleine
Paul Ryan has voted conservative only 57% of the time. Also he favors massive immigration with no limits or restrictions. For these reasons, I oppose him as Speaker.
That’s why I would tend to favor Ryan.
good vibes!!!
The Dow is 40% overvalued and headed for a fall bigger than 2008. The food supply is getting very tenuous so many are buying 25 yr shelf life food storage because of the coming shortages. This will happen, mark my words, as all the signs are there. Panic and chaos will ensue and supermarkets shelves will be empty. Millions are are also stockpiling ammunition for their legal firearms to protect themselves and their family when the crap hits the fan.
Our tyrannical Federal government is responsible for all this and I believe this has been planned. I am not a conspiracy nut but one has to totally out of touch, ignorant and have an IQ around room temperature to not see all the signs. God help us.
Also, Paul Ryan is not the guy to succeed Boehner. He is a mainstream GOPer, soft on the 2nd Amendment, doesn’t want to work weekends and says even if he does something wrong or in disagreement with other Republicans, he wants a guarantee he won’t be replaced. ARE YOU KIDDING ME??? We don’t need another Republican leader who won;t fight Obama and his Marxist allies like the former Speaker and Senate Leader McConnell.
Mike, it seems you and your ilk (those who have been predicting the demise of the market) have been off base. As I told readers here last month, the dip was a great time to buy, especially stocks like Google (with low exposure to China). Yes, earnings are a bit soft for some companies, but for certain juggernauts (especially in the tech and industrials sector) profits are stellar. In my opinion, the 6-year bull market still has two years to run. So buy, buy, buy — but don’t wait until the train has left the station. The only sector not worth buying right now? Health care. Hillary pretty much destroyed that group with one statement.
The action in Amazon, Microsoft, Google, and Facebook says you are absolutely correct. Jim
This phony money may cause this economy to collapse from bad investment exhaustion.
Weekly Trader’s Outlook for October 23, 2015: Global QE & strong technicals ignite markets
Photo: Randy Frederick
By
Randy Frederick
– October 23, 2015
Follow me on Twitter @RandyAFrederick. I’ll tweet interesting observations about volatility, equities, put/call ratios, technical signals, economics etc. as I see them.
Note: Due to a system upgrade, there will be no Weekly Trader’s Outlook published on October 30, but we will be back again on November 6.
Weekly Market Review:
Q3 earnings season is still in relatively early stages. So far about 15% of S&P 500 companies have reported and below are the results relative to previous quarters.
Quarter
EPS beats
Rev beats
Q3’15
68%
39%
Q2’15
70%
48%
Q1’15
68%
43%
Q4’14
69%
58%
Q3’14
73%
60%
Q2’14
67%
64%
Q1’14
68%
52%
Q4’13
65%
61%
Q3’13
67%
54%
Q2’13
66%
53%
Q1’13
66%
46%
Below is a table of some of the high profile companies that announced earnings this past week.
Earnings Recap
Symbol
Actual
Estimate
MS
0.42
0.63
HAS
1.58
1.53
IBM
3.34
3.31
VZ
1.04
1.02
TRV
2.93
2.27
UTX
1.67
1.55
HOG
0.69
0.78
LMT
2.77
2.72
BA
2.52
2.21
GM
1.50
1.18
KO
0.51
0.50
YHOO
0.15
0.16
CAT
0.75
0.78
MCD
1.40
1.27
MMM
2.05
2.00
AXP
1.24
1.31
EBAY
0.43
0.40
LLY
0.89
0.76
UAL
4.53
4.55
GOOGL
7.35
7.20
AMZN
0.17
-0.13
MSFT
0.67
0.58
PG
0.98
0.95
On Target:
None
Upside surprises:
NAHB Housing Market Index for Oct: 64 vs. 62 est
Housing Starts for Sep: 1206k vs. 1150k est
Weekly Jobless Claims: 259k vs. 265k est
Existing Home Sales for Sep: 5.55M vs. 5.39M est
Downside surprises:
Building Permits for Sep: 1103k vs. 1170k est
Index of Leading Indicators for Sep: -0.2% vs. -0.1% est
It was a relatively light week for economic reports, but it is worth noting that despite a very modest uptick, the 4-week moving average of weekly jobless claims remains at a 43-year low. The 4-week moving average has dropped 390,000 (-59.7%) since it peaked in March 2009.
7 year SPX & inverse jobless claims
Source: Schwab Center for Financial Research
Technicals
Technical traders who have been paying very close attention to the “W†pattern of the recent double-bottom are likely delighted that the SPX has now very confidently left it behind. Not only has the SPX successfully taken out the 1990 closing high and the 2020 intraday high in the middle of the “Wâ€, but also the 50-day SMA (simple moving average). And as I’m writing this Friday (10/23) it is even threatening the 200-day SMA for the first time since 8/19/15. Two weeks ago in this section I stated, “Strictly from a technical perspective, it appears that the next level of resistance may not come until at least 2047…â€. The SPX broke that resistance on Thursday 10/22.
6 month SPX chart
Source: StreetSmart Edge®
Volatility:
VIX Index
The current 20-day historical volatility average on the VIX is 119% versus 120% last week. The VIX has closed below 20 for 14 consecutive sessions now. At its current level it is about 2 full points below its YTD average of about 16.62, which seems to indicate that participants see very little chance of another major downturn in the market at the moment. As a result, I see the VIX as moderately bullish in the very near term for the market. While generally in a declining trend, it remains well above the yearly low levels we saw a few months ago, so I see the VIX as neutral in the long term. Long-term for the VIX usually indicates days, not weeks.
At +70 versus +144 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is lower this week. Call prices have risen and put prices have fallen this week. At this level the gap is in the neutral zone, so I see the VIX IV Gap as neutral in the very near term. For now it remains moderately bullish in the long term.
VIX Futures
At the moment, the difference between the sum of the 3rd and 4th month futures and the 1st and 2nd month futures is 3.01 versus 2.40 last week. This decline reflects how much more the near-term expirations have dropped in conjunction with the VIX index, relative to the longer-term expirations, which are little changed.
As of this writing (mid-day Friday 10/23), the nearest VIX futures contract (which expires on 10/28) was trading at 15.30, less than a point above the spot VIX level of 14.88. Adjusting this price for my proprietary risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 15.01, only modestly above the spot price.
With an adjusted level that is just barely above the spot price of the VIX, futures traders are indicating that volatility is about on target at the moment. Therefore I see VIX futures as neutral in the near term for the market. Keep in mind; these contracts expire on 10/28, which is next week Wednesday.
The RPAPs of the next two closest futures contracts are 15.25 and 14.96 respectively. With adjusted levels that are also very close to the spot VIX, I see VIX futures as also neutral in the long term for the SPX.
Since VIX futures are typically much less reactive to current market conditions than the VIX index, near-term for VIX futures usually means a few days, while long-term means a couple of weeks.
This week the VIX Hedging Effectiveness is Moderate in the near-term. At the moment, this means that options on the VIX (and possibly other volatility related products) are showing a little sensitivity to market volatility, and may be only moderately effective as hedging tools in the very short term. VIX Hedging Effectiveness remains Good in the long term.
VIX Hedging Effectiveness is a manner of measuring the magnitude of VIX moves relative to the magnitude of SPX moves in the opposite direction. When the VIX is highly reactive, VIX related products can serve as potentially effective hedging tools, when the VIX is not very reactive, traditional hedging techniques may be a better choice.
Global Review/Outlook
Asia
This week China announced that Q3 GDP grew by +6.9%, but Deutsche Bank is forecasting a pickup to 7.2% in Q4. If that happens, it would be the first uptick since Q2 ’14. Additionally, in an effort to expand the use of Yuan in international trade, and concurrent with Chinese president Xi Jinping’s visit to London, a first ever sale of 5B Yuan 1-year treasury bills were offered for sale in London at a yield that is expected to bring about 3.1%. Finally, on Friday morning (10/23) The PBOC (People’s Bank of China) announced that it had cut its benchmark 1-year lending rate from 4.6% to 4.35% and the 1-year deposit rate from 1.75% to 1.5%, sparking a domestic pre-market equity futures rally in the US.
Europe
Most economists agree that ECB (European Central Bank) President Mario Draghi will soon be implementing more monetary stimulus, as Eurozone inflation data remains well below estimates and targets. With the odds of a Fed rate hike <10% in Oct, at least that won’t be an inhibitor. The German PPI (Producer Price Index) for Sep came in at -0.4% month-over-month and -2.1% year-over year. This was well below consensus estimates of -0.2% and -1.8% respectively. The Eurozone Composite PMI Index of manufacturing and services improved to 54.0 in October, from 53.6 in September. That was above the expectation of 53.4.
Economic reports for next week:
Mon 10/26
New Home Sales for Sep – This report measures sales activity of newly constructed homes and other single family dwellings. While this report is generally considered less important than building permits since it is more of a trailing report, the Aug release was well above expectations and the overall trend remains upward.
Tue 10/27
Durable Goods Orders for Sep – This is a key measure of consumer and industrial spending trends and often causes market swings if it misses estimates. While manufacturing dipped in Aug, it was mostly transportation related. The overall trend has been modestly lower for the past 3 months.
Case-Shiller Home Price Index for Aug – This index measures the change in the average prices of single-family, residential real estate across a broad section of 20 major cities in the US. The Jul report was below expectations.
Conference Board Consumer Confidence for Oct – Last month’s read on this report was a 7-year high. While there are several other confidence measures, such as the University of Michigan Consumer Sentiment number which comes out on 10/30, they don’t always agree. While this one has generally been stronger in recent months, a sideways trend in gasoline prices and the recent stock market recovery both probably favor an uptick.
Wed 10/28
FOMC Report – The Fed Funds Futures are forecasting only a 6% likelihood that the Fed will raise rates after this meeting concludes.
Thu 10/29
Weekly Jobless Claims – For the week ending 10/17/15, claims increased 3k from 256k to 259k, after decreasing 6k the prior week. The 4-week moving average now stands at 263k, down 2k from the prior week. With this downtick, the 4-week moving average is now at its lowest level since 12/15/1973.
GDP for Q3 – This is the first estimate (Advance) for Q3 and the consensus seems to be in the range of +1.0% to +1.7%; much lower than Q2. You’ll recall that the Advance report in Q2 showed just +2.3% originally, but was upgraded to +3.7% in the Preliminary report and finally +3.9% in the Final report.
Pending Home Sales Index for Sep – This report measures actual contracts signed, whereas existing sales (reported last week) measures actual closings, so this one is slightly more forward looking. Pending home sales ticked down in June, down in July, but up in August. This one will only affect the market adversely if it comes in very low.
Fri 10/30
Personal Income & Spending for Sep – This report uses data from the monthly employment report to gauge income from wages and salaries. Personal income is also sometimes used to forecast future consumer spending.
Personal Consumption Expenditures (Core PCE) for Sep – PCE includes durable goods and nondurable goods which are directly influenced by the retail sales reports; and services. This is the Fed’s preferred inflation gauge and the Fed’s target is 2.0%. The year-to-date pace is running at about 1.5%, which is well below the CPI rate of 1.9%.
Employment Cost Index for Q3 – This is a measure of payroll compensation costs, which is typically the largest cost of doing business. Wage inflation is important because of its potential impact on profit margins. Wages tend to rise when labor demand exceeds labor supply.
University of Michigan Consumer Sentiment for Oct – This is the final report for October. While the last October report was the highest since July, sideways gasoline prices and the stock market recovery should lift sentiment somewhat.
Trader's Outlook:
While the actual deadline doesn’t come into play until the week after next, the fact that Treasury Secretary Jack Lew has moved the likely date that the US Government will run out of money to pay its debts, 2 days sooner to November 3, could begin to weigh on the markets next week. In fact, I suspect the uptick in interest rates we’ve already seen, is probably due to some profit taking on US Treasuries ahead of this date.
As if this matter wasn’t causing enough uncertainty already, House Speaker John Boehner’s resignation and the absence of a clear successor has made things event worse. While John Boehner originally announced that he intended to leave at the end of October, he also said he would remain in the role until his replacement was selected; that may be before or after November 3, unless the new front runner Paul Ryan is confirmed, next week. You may recall in October 2013 a last minute agreement avoided default and again this time, some republicans have vowed not to raise the debt ceiling without comparable spending cuts. President Obama has stated that he will only sign a clean debt ceiling bill; thus the stalemate continues.
If Congress can avoid a treasury default by 11/3, just beyond that, a new budget bill must also be approved to fund normal government operations beyond the 12/11 deadline set by the previous stop-gap spending bill approved in September. Seasonal factors favor a positive market move this time of year, but these issues could complicate matters a bit.
Bottom Line:
China cuts interest rates, the Eurozone ponders more quantitative easing & technology earnings surprise to the upside.
Two weeks ago I stated that, “An SPX close above 2021 would likely leave room for a rally up to the 2047 level, before any technical resistance is encountered…†That threshold was not exceeded until 10/15, but then within 5 more sessions, the SPX had closed above 2047. As a result, the SPX now has to contend with 2058, which is the level it started at the beginning of the year and the 200-day SMA (simple moving average) of 2060.
As I’m writing this (mid-day Friday 10/23) the SPX is currently above both of those levels with seemingly plenty of upside momentum. The big question for traders next week is whether or not geopolitical issues will put the kibosh on this massive 9%+ rally that has ensued in the last 3 weeks.
As you can see below, there were only a few changes this week and it appears that the bullish indicators are pretty much cancelling out the bearish indicators. That means the consensus outlook for next week is Neutral overall. While volatility is likely to remain generally low, traders should be prepared for a probable increase in volatility prior to the Wednesday afternoon Fed meeting, even though it is likely to be a non-event.
Composite Market Sentiment
Composite market sentiment table
Key:
OI = Open Interest
OIPCR = Open Interest Put/Call Ratio
VPCR = Volume Put/Call Ratio
IV = Implied Volatility
+ means this indicator has changed in a bullish direction from the prior posting.
– means this indicator has changed in a bearish direction from the prior posting.
+/ – means this indicator has changed bi-directionally; i.e. last week was either N/A or Breakout.
Very detailed report, Gary. Maybe you should work for Weiss. LOL!
All I can do here is quote Charlie Brown. “Good Grief”. Jim
you’re over thinking this. a recession is far off in the future. we’re in a correction, which is almost always a buying op – a time to make more money. what could be easier?
Gary, the magnitude of research compiled in your post is truly appreciated. Very well done.
there’s times to make money and there’s times not to lose money. that’s all i need to know.
As you know, Russia has established a Command Center in Bagdad, to coordinate Iranian, Iraqi, Syrian (and Russian) efforts against rebels, including ISIS. Now the U.S. has told Iraq to choose, us or the Ruskies.
Before 2002, the Iraqi people lived under a brutal dictator, Saddam. As with all such regimes, the average Iraqi lived a restricted, but fairly peaceful and prosperous life, as long as they followed the rules. We overthrew Saddam and his regime, but things have certainly been anything but peaceful and prosperous for most Iraqis since then. Should we really be surprised if Iraq would choose to give the Ruskies a chance?
Our Kurdish friends could be in trouble, of course, since they have issues with Iran, Iraq and Syria, not to mention Turkey. Turkey might be tempted to join that command structure, even if it puts them against us. Oh, love that Middle East. Such a calm and predictable place to try and tell them they should run their lives our way.
Turkey is the big kid on the block. They would love to reestablish the Ottoman
Empire. Seljuk Turk influence would be acceptable to most Middle Easterners from Libya to the Stans of Central Asia, instead of Europeans or Americans. Many people don’t realize how significant Turkish involvement is. It’s a biggie! Jim
Turkey and Russia both want a bigger say in the region. They could conceivably work together until it is time for them to oppose each other. That would be another powder keg.
They would both love to take advantage of our growing weakness.
In my 50 plus years of investing in every imaginable creative vehicle that Wall St. could create, I have never in my lifetime seen such a degree of “simply unlimited unrealistic and creative growth incentives” devised for “common worldwide consumption.” These vast
entire “worldwide recommended scenarios are being “built and promoted on s a n d.” What do we do when we can no longer “parse every word or sentence uttered?”
There is no One World… yet. No thing will work everywhere or for all situations.
Mike, your bearish comments don’t jibe with Larry Edelson’s prediction that the next 1 to 2 years will see a USA surge from European and Japanese investors moving money to the USA for safety. AFTER WHICH your gloom and doom scenario will hit the USA too.
wheather its bear mkt rally or otherwise that time will tell,but u need to check as u mis judged mkts three times since June,expecting a Fed hike and subsequent world mkt crash,everybody knows all these about expected hike,but Fed is not doing still,we missed an opportunity is not so imp as much as not being able to judge mkts,also your colleague Larry & u seem to differ on mkts somewhat,this is confusing,need to make it simple as u both represent Weiss.
I believe the dollar may well be rallying into a fifth and final wave up, As commodities then resume their move down will that finally lead to some markets deflating in Europe. In particular I think of the British property bubble.
No Question, there is a massive amount of deflation occurring for all these easy money policy decisions…..
did not easy money policies inflate, not deflate, stock prices, real estate, gold, oil and many other assets? won’t tightening by the fed do the opposite? i’m confused. you’ll have to help me with this one.
Nothing re the markets are surprising. FYI…You might want to check
the recent edition of The Atlantic magazine regarding information about
GE and a number of other more obscure stocks that rated some favorable mentions.
JAS
I think you are right on in this email, Mike. But of course there has been no reason in all of this really since 2000. Debt has increased, margin has increased drastically, disposable income has fallen globally and every significant indicator says we are in a greater debt bubble. The politicians of the world have drastically increased their public debt to see world failing economies. Fund managers have as little cash as ever. So how long can it continue? Probably further. Logic is completely absent in this bubble.