The selloff this week has created some consternation for investors looking for the major market indices to continue their climb from last October's lows.
However, this selloff was to be expected as the S&P 500, Nasdaq, and Dow Industrials were significantly overbought on a technical basis.
While we have pulled back to some support levels, investors need to pay attention to the data coming out and how it contradicts the market rally.
The February Markit eurozone purchasing manager's index dipped back below 50 to 49.3 after printing a 50.4 level in January. The worrisome data came from Spain and Italy which logged worse than expected PMIs indicating that their economies are doing worse than expected. When the situation in Greece is given a Band-Aid it appears as though the market will shift towards Iberian Peninsula and Italy in short order.
China is showing that the real estate bubble may be coming to an end by lowering GDP expectations to 7.5% as the HSBC Flash China Manufacturing PMI logged a 49.7, just below the expansion line of 50. While the number is an improvement over the last few months, when combined with the GDP reduction Chinese manufacturing looks to be slowing over the coming months.
Even though the US appears numerically to be moving into a sustainable recovery as evidenced by the improving PMI and employment numbers, one should look upon this data with a significant amount of skepticism. Recent port data out of Los Angeles and Long Beach confirms the slowdown, with inbound and outbound container traffic at both ports flat from a year ago.
The problem is that the PMI data conflicts with port data and retail sales, which rose by 0.4% or half of estimates, while November and December data was revised lower by 0.1% in each month.
Adding to the uncertainty, the early estimates for first quarter GDP data are coming in at 2%, a drop from the fourth quarters 3% revised print.
With the broader indices up more than 20% from last October investors should be prepared to take some profits off the table and look to inverse or short ETF's in the Nasdaq (PSQ), S&P 500 (SH), and Dow Industrials (DOG) as a hedge for their portfolios.