Still Concerned About Tone of Market's Advance

This is becoming a familiar refrain: Stocks, commodities and bonds all remain in strong uptrends, even as the U.S. dollar continues to weaken. Such highly correlated moves can persist for a time, but not indefinitely. Bond prices have moved higher (and yields lower) reflecting deflationary forces at work. Commodities, on the other hand, continue to march higher and are up some 30 percent from their lows, thanks to strong demand from emerging economies. Stocks are traveling with commodities in anticipation of stronger growth here in the U.S., while ignoring the message of the bond market. We may even enjoy some growth for a period, but the rise in commodities simultaneously threatens to bring about a premature end to that growth.

We continue to have serious concerns about the tone of the stock market’s advance. Trading volume has been in a pronounced contraction for months. Last week, and again yesterday, we saw stocks move higher even as trading volume has dried up. If you filter out program trading, which accounts for as much as 30 percent or more of total NYSE volume on any given day, you’ll see the market truly is running on fumes. Under healthy conditions, the market advances in an increase in trading activity.

Earnings reporting season is underway once again. So far, we’ve seen companies beat on the earnings front, by and large. That’s not much of a surprise since profit expectations for the third quarter have been set pretty low. But at the same time, companies continue to fall short of sales projections, despite somewhat easy comparisons with the year-ago period.

Ultimately, we need to see an improvement in the top line numbers if stocks are to meet investors’ lofty expectations for bottom line results. Looking back at this time a year ago, analysts were overly optimistic with their earnings forecasts. And they are likewise overly confident this time around as well, judging by the economic data rolling in and surveys of corporate spending and hiring plans for the coming months.

We’ve not been all that active with our trading of late. While the next big move is likely to be to the downside, it’s not clear if the market is rolling over yet. And as we’ve seen throughout this rally, being on the wrong side of the trade can be very painful. Sometimes it pays to wait, rather than trading for the sake of trading.

Comments

[Macro_Man:]

Largely agree with you. The market seems to be tiring, otherwise could have expected a much easier spike after the strong Intel and JPM earnings. Perhaps they want to get BAC and Citi out of the way before celebrating.

Just as the rally started when things were looking terrible in March, perhaps we will start the sell off on good earnings and when things seem better.

But, too early is too painful. Better a little late than too early.

Oct 14 12:45 PM

[The Geoffster:]

I covered my S&P shorts because I can't compete with the Fed and its masters at the trading desks of "The Too Big To Fail." They're not too big to fail, they're too big to jail. The bond market is telling us that the Fed will fail to reflate and we will experience Japan style deflation.

Oct 14 12:52 PM

[JPDX:]

I agree completely. The S&P at 1100 is a major wall in this market. A pullback is coming probably by early November.

Oct 14 01:01 PM

[Will.i.am:]

We are running on HOPIUM

Oct 14 01:29 PM

[Victor84:]

Eventually you SA'ers will be correct and a pullback will occur. Just like it happened at 700, 800, 900, 1000. Not saying you're wrong, but it does get comical after a while.

Oct 14 02:13 PM

[Wildebeest:]

"Commodities, on the other hand, continue to march higher and are up some 30 percent from their lows, thanks to strong demand from emerging economies."

I'd take issue with that in an otherwise nice article. In US dollars commodities are up but correct for dollar weakness (for example divide by trade weighted index) and the rise has been much more modest. As far as strong demand goes, if we look at base metals (can't speak for other commodities), stockpiles having been rising all year bar a short period of China accumulating copper in mid year. In the case of nickel and aluminum the stockpiles are at decade highs. Rising stockpiles don't eventuate when their is strong demand (particularly given that supply is down on 08 numbers due to mine closures etc.).

I'd conclude that commodities are up due to a mix of dollar weakness and speculative expectations of a return of strong demand.

Oct 14 02:18 PM

[ebworthen:]

It is a tragicomedy.

Rising equities and markets along with commodities do not signal a recovery.

The longer the taffy-pulling goes on, the greater the collapse will be.

I would have rather seen another correction at S&P 800-1000.

Now, we are simply building another house of cards on the backs of the average taxpayer. Like all ponzi schemes, they work for a time. The end of societal ponzi schemes end in bloodshed; I think that is why a lot of people are frustrated and angry.

We know that what caused the collapse is wrong, what is causing the "recovery" is wrong, the actions before and after have been immoral, and the financial, emotional, and physical result will unravel further what many of us have tried to hold together.


On Oct 14 02:13 PM Victor84 wrote:

> Eventually you SA'ers will be correct and a pullback will occur.
> Just like it happened at 700, 800, 900, 1000. Not saying you're wrong,
> but it does get comical after a while.

Oct 14 02:51 PM

[Roger Knights:]

"Eventually you SA'ers will be correct and a pullback will occur. Just like it happened at 700, 800, 900, 1000. Not saying you're wrong, but it does get comical after a while."

It only hurts when I laugh.

Oct 14 03:41 PM

[Wildebeest:]

On Oct 14 02:18 PM Wildebeest wrote:

> "Commodities, on the other hand, continue to march higher and are
> up some 30 percent from their lows, thanks to strong demand from
> emerging economies."
>
> I'd take issue with that in an otherwise nice article. In US dollars
> commodities are up but correct for dollar weakness (for example divide
> by trade weighted index)

I meant multiply and normalize to whatever the TWI was at the start of your data set.

Oct 14 06:43 PM

[The Recusant:]

Great article! Succinct yet insightful. I wonder if the dollar's low to other currencies has created a fire-sale for foreign investors. Certainly the small investors are still on the sidelines, hence the low volumes recently as only the risk-takers like banks, hedge funds, commercial investors, and derivatives drive the Dow up in order to reclaim profits for their end-of-year reports. But the direction will be downward when companies report quarterlies in the red and M&As start to eat up competitors and dump the workers into the unemployment lines. Until more jobs are created to subside the fears of inflation and job loss, the private investors/consumers will remain off the charts and reports and hamper a true recovery.

Oct 14 06:49 PM

[FB5000:]

You need to change the picture, Professor.

You need to update.

I think you must be wearing a barrel by this time.

Your closing paragraph almost makes me feel sorry for you. You've been spinning the same nonsense since 700 on the S&P.

Yep. We are going to retest the lows. I can feel it in my bones.

Oct 14 09:55 PM

[Steven Hansen:]

the market tries always to be ahead of itself - this is what is being conveyed in this article. there always needs to be the illusion that the market is advancing towards these expectations.

i am not sure a pull back is eminent - but i sure as hell remain defensive. there appears to be strong hands guiding this advance, and continually protecting against retreat.

the dilemma for most is that we are seeing the market advance against residual economic weakness. it is not adding up.

Oct 15 08:00 PM

[FB5000:]

What weakness?

Leading Indicators are flashing bright green.
You saw the Empire report come out today - highest since May 2004.

You want employment growth - but that is the last thing to happen. That will be the time to get defensive. Just before the top.


On Oct 15 08:00 PM Steven Hansen wrote:

> the market tries always to be ahead of itself - this is what is being
> conveyed in this article. there always needs to be the illusion that
> the market is advancing towards these expectations.
>
> i am not sure a pull back is eminent - but i sure as hell remain
> defensive. there appears to be strong hands guiding this advance,
> and continually protecting against retreat.
>
> the dilemma for most is that we are seeing the market advance against
> residual economic weakness. it is not adding up.

Oct 15 09:29 PM

[Wildebeest:]

What leading indicators do you suggest show a recovery is either here or soon to be here?

On Oct 15 09:29 PM FB5000 wrote:

> What weakness?
>
> Leading Indicators are flashing bright green.
> You saw the Empire report come out today - highest since May 2004.

got a link?

>
>
> You want employment growth - but that is the last thing to happen.
> That will be the time to get defensive. Just before the top.

Oct 16 02:00 PM

[FB5000:]

Dude, this isn't rocket science. Have you been out shopping lately?

Also read below.

US Recovery Poised to Trounce Any ObstaclesReuters
October 16, 2009

(Reuters) - A weekly index of future U.S.economic growth edged down in the latest week, but its yearly growth rate rose to a new record high that further suggests signs of a tapering recession, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index slipped to 128.1 in the week to Oct. 9 from an upwardly revised 129.1 the previous week, which was originally reported as 128.3.

But the index's yearly growth rate climbed to a fresh all-time high of 27.9 percent from 27.4 percent the prior week, which was revised higher from an original 26.1 percent.

The group's data has posted annualized economic growth at record high rates since September. Earlier this year, the growth rate was struggling to dig itself out of deeply negative territory.

"Such a pronounced, pervasive and persistent upswing in the WLI and its components assures that this economic recovery can overcome any obstacles in the months ahead," said ECRI Managing Director Lakshman Achuthan.

The report's yearly growth gains are in step with U.S. industrial production figures released earlier on Friday that suggest the third quarter closed out with surprisingly strong economic growth.

"IP numbers are very much in line with our April forecast that recession would end over the summer," said Achuthan, who has said chances of a double-dip recession are highly unlikely.

This week's index dipped largely due to weaker housing activity, Achuthan said. The growth rate is derived from a four-week moving average, and occasionally moves inversely to the weekly index level.


On Oct 16 02:00 PM Wildebeest wrote:

> What leading indicators do you suggest show a recovery is either
> here or soon to be here?
>
> On Oct 15 09:29 PM FB5000 wrote:

Oct 17 06:11 PM

[toobad41:]

Perhaps there is a serious gap between Wall Street and Main Street. The Wall Streeter does what he always does and is still actively trading. The Main Streeters have no choice but to sit on the sidelines. The recession has really hurt the Main Streeters. They have no extra cash to put into the market. Thus the trading volume is low because 80% of the people can't afford to risk their remaining cash reserve

Oct 17 09:06 PM

[FB5000:]

here's what's happening.

stock have gone up on little volume why?

everybody panic sold into March. if you were not going to sell you are a committed holder.

as buyers come back there is very little supply - why sell the S&P at 1000 if you bought at 1400 and rode it down to 666. Especially if the alternative is money market.

here's the good part. inflows into stock funds have been lagging behind bonds. that's really bullish. if Joe avergae is running into bonds then stocksare the place to be

even better. earnings are booming and guidance is getting better. best for a long while.

Oct 17 10:39 PM