Good Morning. Five days ago, the bears seemed to have everything going their way. After one of the best first quarter performances in years, the stock market was overbought, sentiment had become too upbeat (or at the very least, traders had become more than a little complacent), and hedge fund managers were falling all over themselves trying to play catch up with their benchmarks (aka the S&P 500). Thus, as I wrote on March 28th, it was time to prepare for some sort of a correction, pullback, or sloppy period.
In that column, we talked about some simple ways to prepare for what appeared to be an inevitable corrective phase by raising some cash, adding some volatility to portfolios via the VXX (iPath VIX Short-Term), VXZ (iPath VIX Mid-Term), or TVIX (VelocityShares 2X VIX), as well as hedging a bit of long exposure via the SH (ProShares Short S&P 500) or SDS (ProShares UltraShort S&P 500). Although predictions really and truly aren't my thing, this one was spot on as the market peaked three days later and the SPX managed to lose about -4.5% in just five sessions.
On April 10th, with the indices diving in earnest, it felt like the bad-old days of 2011 were back. Intraday volatility had returned. The European Sovereign Debt Crisis was making a comeback thanks to spiking yields in Italy and Spain as well as fears that France would be the next problem (there were rumors daily that a downgrade of France's sovereign debt was imminent). There was the obvious slowdown that was occurring in China. There was the falling expectations for earnings in the U.S. (analyst downgrades to earnings forecasts far exceeded upgrades during the pre-announcement period). There was the fact that the economic data around the globe (specifically the global PMI and ISM readings) were faltering. And it had become clear that the momentum in the jobs market that had been building in the U.S. was fading fast.
Oh, and lest we forget, the technical picture was becoming worrisome at that time as the DJIA and S&P looked like they were falling off of a cliff. And then the bears even got Apple (AAPL) and Google (GOOG) on their side as these tech heavyweights had held up beautifully during the initial phases of the decline. Heck, while the S&P appeared to be breaking down on April 10th, AAPL was hitting another all-time high. But as every seasoned manager knows, the bears get to EVERYTHING eventually, so it was unnerving to see AAPL finally start to succumb to the sellers on April 11th. In short, things didn't look good.
But then Apple's earnings and hope for additional stimulus from Bernanke & Co. (aka "another QE fix") intervened. And just like that, the indices rebounded, aided in no small part by Apple's $50-point pop on 4/25.
My apologies for the replay of history here this morning. However, as I've said a time or twenty, it is important to understand how and why things unfold in this game. And the bottom line is that although the bear camp had just about everything in their favor from April 3rd through April 25th, they weren't able to get anything more than a garden variety pullback going. Thus, it appears that we may have seen the worst of the corrective phase.
But ... (You knew that was coming, right?) While the correction may have ended, this does not mean that the consolidation phase that I've been yammering on about for weeks has. So, unless and until the bulls can push the Dow above 13,300, the S&P above 1420, and/or the NASDAQ above 3125, we should probably continue to play the game using consolidation-phase rules. However, if the bulls do manage to break on through to the other side for more than a day, then feel free to break out the champagne.
Turning to this morning ... Weak data out of Germany, S&P's downgrade of 16 Spanish banks, and the fact that Spain has slipped back into recession has pushed European markets into the red and the S&P futures down in the early going.
On the Economic front ... Personal Incomes rose by +0.4% in March, which was above the consensus expectations for an increase of +0.2%. The February level was revised to +0.3% from +0.2%. Personal Spending (now called "Consumption") for the month increased by +0.3% which was below the expectations for +0.5% and the February reading of +0.9%.
Major Foreign Markets:
- Australia: +0.76%
- Shanghai: Closed
- Hong Kong: +1.70%
- Japan: Closed
- France: -0.83%
- Germany: -0.03%
- Italy: -0.29%
- Spain: -0.77%
- London: -0.40%
- Crude Oil Futures: -$0.66 to $104.27
- Gold: -$2.40 to $1662.40
- Dollar: higher against the yen, euro, and pound
- 10-Year Bond Yield: Currently trading at 1.92%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -3.81
- Dow Jones Industrial Average: -26
- NASDAQ Composite: -9.40