Good morning. In Thursday's missive, I wondered aloud if we might be seeing the beginnings of a shift in the trend of the economic data. This would be important because from a big-picture standpoint, the macroeconomic outlook has been a driving force behind the three important trends seen in the stock market so far in 2012. So, if the trend of the data is changing, then it makes sense to assume that the stock market trend might be able to change right along with it.
Recall that stocks rallied in the beginning of the year as report after economic report was accompanied with the words "better than expected." However, the trend didn't last too far into spring as the BTE theme turned to a WTE (weaker than expected) theme around April Fool's day. Soon after traders fretted that the economy's soft patch would turn to something more serious (thanks in part to our friends across the pond), which prompted yet another summer swoon. Then in late summer, as Ben Bernanke began to talk about firing up the printing press for another round of QE, the hope for an improving macro view took stocks higher.
More recently, traders appear to be rethinking that rosy outlook as the stock market has spent the last seven weeks in a consolidation/corrective phase. The damage hasn't been too bad, unless you happen to own the likes of Apple (AAPL), Google (Google), IBM (IBM), Intel (INTC), Chipotle (CMG), McDonalds (MCD), etc. But from an market index standpoint, the current fretting about the economy and earnings has been relatively mild. The general thinking appears to be that Washington won't let the economy head over the 'Cliff' and that once the election is over, there might be some clarity on the economic outlook. And with Bernanke's cavalry saying they will ride as often as necessary until the unemployment rate gets to a level more to their liking, well, there hasn't really been a reason for the recent sell-off to turn overly ugly.
Speaking of ugly, beginning in September it was the raft of punk economic data and an earnings season that was clearly WTE that were the driving forces behind the current sloppy period. While I'm not going very far out on the limb to say it; I'd be willing to bet that if the data starts to improve, stocks would follow suit. This thinking certainly made sense after Thursday's bevy of upbeat economic data sent stocks to their best day in some time. And then with the Jobs report coming in well above expectations, it looked like BTE was back.
However, a funny thing happened on the way to Friday stock market party. It only lasted two minutes. Yes, literally - the rally that the futures had forecasted prior to the market opening produced a grand total of two green 1-minute bars before the sell programs started. Initially, I wasn't too concerned about the early selling because I know that trend-following algos tend to reverse after an initial pop. But this time, it was the pop that was reversed as green turned to red across the board before the end of the first half- hour of trading.
After the usual period of waffling, things got ugly in the afternoon as three distinct waves of sell programs knocked 5, 5, and 6 points off the S&P 500 in downward spikes lasting only a handful of minutes each. To be fair, this type of action isn't unusual these days as there are likely oodles of algos designed to chase stock market trends measured in seconds all day long. The problem on Friday though was there wasn't any news to trigger the quick dives. Nope, this appeared to be quants playing their reindeer games.
One explanation for the wicked action on Friday was that Apple had broken below its 200-day moving average, which triggered all kinds of stop losses and what appeared to be a fair amount of piling on from the shorts. But while this did explain one of the day's sell programs, Apple couldn't be held responsible for the entire move from 1427 down to 1413.50 on the S&P 500 Friday afternoon.
It turns out that there was indeed a theme developing Friday that was likely behind a fund/bank or two deciding to hit the sell program button a time or twenty. The talk was that the data from Thursday and Friday might have actually been too strong. The upbeat reports had pushed the dollar higher, which, in turn, causes commodities (which are part of the risk-on trade) to be sold. The theory went on to suggest that if the BTE theme were to catch on, Ben Bernanke's gang might decide to pull the QE punch bowl away tout suite.
To which I would like to reply, seriously? What's amusing here is that there is a large contingent of market players who contend that QE isn't going to do much good. And there are even some Fed governors who feel that QE will actually do harm in the way of higher inflation. Therefore, it doesn't seem to make sense that a hedge fund or a Wall Street bank would run sell programs on the idea that one of the byproducts of a BTE economic theme would be "no QE for you."
Frankly, I think Friday can be categorized as a day of "when the cat is away the mice will play." It was another thin day due to Sandy's wrath and those players in the game appeared to be waiting until Tuesday before making any big commitments. So, was the data too good? Not exactly. But it did make for a nice excuse to push the indices around (I pictured lots of high-fiving going on amongst the quant crowd) on a Friday afternoon when no one was around.
Turning to this morning ... Despite a better than expected Services PMI out of China and rising sentiment gauges in Europe, futures point to a weak opening in the U.S. Apparently there is more talk about Greece leaving the eurozone as well as ongoing strength in the dollar. Thus, it appears that "the trade" from Friday (risk off due to rising greenback) will continue in the early going. However, as we've learned recently, the pre-market futures session is not always indicative of how the day will go.
Major Foreign Markets:
- Shanghai: -0.14%
- Hong Kong: -0.48%
- Japan: -0.49%
- France: -0.99%
- Germany: -0.62%
- Italy: -1.53%
- Spain: -1.82%
- London: -0.64%
- Crude Oil Futures: -$0.02 to $84.84
- Gold: +$5.60 to $1680.80
- Dollar: higher against the yen, euro, and pound
- 10-Year Bond Yield: Currently trading at 1.690%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -4.35
- Dow Jones Industrial Average: -32
- NASDAQ Composite: -9.58