Market Internals
April went out with very little sound, even though stocks were decidedly negative for the day, with tech the underperformer (QQQ) down .71%. Volume was ultra-low, with a mere 115 million shares trading hands on the SPY, compared with a 90-day average of 145 million.
Major market leaders, such as Apple (AAPL) and Chipotle (CMG), moved significantly lower, but on weak volume. Further market internals appear to confirm broad weakness however, with the following momentum stocks posting the following declines:
- Mastercard (MA): -1.16% (Slightly above average volume)
- Intuitive Surgical (ISRG): -1.30% (Very below average volume)
- Starbucks (SBUX): -.10% (Very high volume, evidence of "churn")
As for the financials, the XLF dropped .52%, and is hovering just above the 50 DMA. The next level of support is right at $15, which it was unable to meaningfully break under a couple of weeks ago. Bank of America (BAC), JPMorgan (JPM), and Wells Fargo (WFC) all pulled back hard after reaching their respective resistances, and with the exception of WFC, significantly underperformed the XLF in April. With BAC approaching its 200 DMA, the broader financials will probably follow suit and continue to trend lower.
With tech and financials (XLF) underperforming significantly Monday, I'm inclined to believe these two sectors will lead us lower over the coming weeks and months.
Source: Fidelity.
For the Dow theorists out there, the Dow Transports (IYT) vastly underperfomed the Dow 30 (DIA). Major transports like FedEx (FDX) and UPS are trading below their 50 DMAs, while Union Pacific (UNP) just triple topped and is struggling to maintain the 50 DMA.
Risk Horizons
- G-10 Macro data has turned below its 200 DMA to its worst level in six months. A clear downtrend in macroeconomic fundamentals is under way, and with no easing on the horizon, is likely to continue.
- Chinese PMI Data: both government and HSBC figures come out this week. The HSBC number is more credible, and further contraction is likely. While most analysts are saying a Chinese slowdown is actually a good thing, the reality is that weaker Chinese growth has profound intermediate term consequences on corporate profits and overall macro data.
- Eurozone Manufacturing Data: These figures have continually been sending the market lower as contraction becomes more severe. A miss below 46 for the EU PMI will stoke fears further.
- U.S. Labor Market Data: I actually think these data are unlikely to be a major market risk. While traders haven't fully discounted economic risks, they are more than aware that the labor market has been deteriorating. With Goldman Sachs and other analysts warning of a miss on both ADP and Nonfarm payrolls, the numbers are more likely to print in-line or slightly beat. Unless they miss by a wide margin, I expect them to disappoint volatility traders.
- U.S. ISM Data: After huge misses in the Chicago PMI and Dallas Fed MFG. figures, I expect a miss under the projected 53 on the manufacturing ISM. Almost none of the manufacturing data has come in-line over the past month, and I expect that trend to continue.
- Spanish and Italian Yields: Bonds currently have a permanent bid thanks to the LTRO carry-trade (where private banks receive nearly free ECB cash and invest the proceeds in high yielding, risky sovereign debts), but both nations need to come to the market for billions in new issuance over the next few months. The LTRO cash is drying up, and poor macro data (and risk-off sentiment) could deter private bidders from stepping in.
- Federal Reserve Unwillingness: With oil at $104 a barrel (WTI crude), and the stock market at highs, easing is impossible at current levels downtrending macro data. While the Summer months may provide a historically good time to ease, the chairman will be focused on maintaining credibility; a difficult task in an election year. In short, if the Fed decides to ease so close to the election, he will be accused of "drugging" the public to keep the current administration in power.
- Recent Credit & Equity Divergence and Likely Compression (courtesy of ZeroHedge):
(click to enlarge)
Whereas the SPY is nearly certain to compress back in line with CONTEXT, a broad basket of risk assets. This compression trade has worked several times over the past few months.
