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Christopher Grosvenor, CMT
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Chris earned the Chartered Market Technician designation. He is earning the Chartered Financial Analyst designation and graduated with honors in Economics. Also, he has managed money as a professional trader and independently, and continues to do so. Chris utilizes Technical, Financial Analysis... More
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Grosvenor Research & Analysis
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Professional Fundamental & Technical Analysis
  • Markets Higher As Risk Sentiment Improves  0 comments
    Jul 25, 2012 2:27 PM | about stocks: DIA, QQQ, SPY, XHB

    The Dow Jones industrial average (DIA), S&P 500 (SPY) and Nasdaq-100 (QQQ) are trading higher today as U.K. gross domestic product signaled the country is in a recession. The German Ifo business climate declined to 103.3 from its previous reading of 105.2. Yields on U.S. debt securities are rising as the risk-on trade shows early signs of resuming. Crude oil is traded lower early after inventories unexpectedly rose.

    The equity markets are bouncing off of a support zone and if the support zone holds I'll increase my exposure to the risk-on trade. However, with the advance reading of GDP being released on Friday I remain cautiously optimistic. The Dow Jones industrial average and S&P 500 remain in intermediate up trends while the Dow Jones transportation average is showing signs of heading lower.

    Employment Picture

    The expected rate of inflation is 2.8 percent. The actual rate of inflation 2.2 percent excluding food and energy while the rate including food and energy is 1.7 percent. Unemployment is above its natural rate and growth is stagnant. In recent months we have seen a decline in the rate of inflation, employment growth and economic growth.

    The economic environment favor is mix of stocks and bonds. Bonds should probably be a larger portion of the portfolio since the economy is operating in a recessionary gap and not an inflationary gap.

    With inflation below the expected rate, GDP growth slowing and gains in the employment stagnating, I expect the FOMC to take additional steps to increase the rate of inflation. In other words, increase the quantity of money and continue to provide investment incentive.

    As the same time, companies are reporting shortages of medium and high skilled workers. U.S. companies, unlike their overseas counterparts, don't invest as much in training employees. The result is a less productive workforce and stagnant economic growth.

    Home Sales

    The homebuilders (XHB) have been a market leader this year returning 24.4 percent year-to-date while the S&P 500 is up 7.7 percent year-to-date. Data on new home sales released today showed the pace of new home sales slowed to 350,000 from 382,000.

    The median selling price of new homes was $232,600 while the average price was $273,900.

    The data suggests a slowing of the pace of investment in new homes, a consumer favorite, and adds to evidence of slowing economic growth.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Themes: market-outlook Stocks: DIA, QQQ, SPY, XHB
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