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MM Market Notes: Unusually Uncertain

|Includes:AKS, HD, LOW, MT, SHLD, VanEck Vectors Steel ETF (SLX), X

Stocks traded lower Wednesday as broad averages ran into resistance and traders reacted to the release of the Fed's Beige Book survey.  To quote Ben Bernanke, the economic picture has become "unusually uncertain" as the recovery loses steam.

The term accurately describes the market action as well, with uncertainty leading to volatility.  Second quarter earnings reports have on balance been positive, but corporate strength appears to be largely driven by cost cutting, rather than true business growth.  As the bulls juice the market and send the averages above their key moving averages, uncertainty lingers for the time being.

Unusually Uncertain...
  • The Fed's latest beige book report of economic conditions showed only modest advances in retail sales across the country. Housing and construction numbers remained weak, while bank lending was still tight. (WSJ)
  • ...the beige book, described an economy struggling under the weight of a depressed real estate market, high unemployment and wary consumers. (NYT)
  • The Fed’s Beige Book anecdotal survey of the US economy said that in some regions manufacturing activity had “slowed or levelled off” but that “economic activity has continued to increase, on balance”. (FT)
Despite the uncertainty, there are some trading takeaways we can glean from the economic reports - and some attractive setups worth trading as we close out the month.

Manufacturing Called Out

Domestic manufacturing got the most attention - not only from the Beige Book survey but also from the Durable Goods Report showed contraction in demand for goods expected to last 3 years or more.

Steel stocks were weak and are now looking like attractive short candidates depending on the broad market as a backdrop

Market Vectors Steel (NYSEARCA:SLX) may be trading above the key moving averages, but the failure to hold its breakout above the June swing high is concerning.

A steady uptrend which begain in early 2009 has now been definitively broken and
looking at a weekly chart it is clear that the path of least resistance is lower...  To get comfortable shorting this ETF, I would want to see volume increase on negative days, but there are significant fundamental and technical red flags emerging...

Speaking of volume,
ArcelorMittal (NYSE:MT) saw above average volume Wednesday as the stock slid below the 50 EMA.

The company missed Q2 earnings expectations and although management is cutting costs, weaker demand has management -
and investors - concerned.

Other steel names worth keeping at the top of the watch list include
US Steel (NYSE:X) which recently kissed the 200 EMA before turning lower on strong volume, and AK Steel Holding (NYSE:AKS) which can't seem to get out of its own way.

Durable Goods and Retail

While the Beige Book data implied strength in non-discretionary spending, the durable goods weakness was disappointing for retailers selling appliances, hardware, and other big-ticket purchases.

Home Improvement
blue chips Home Depot (NYSE:HD) and Lowe's Cos (NYSE:LOW) resumed their negative price action with both stocks falling back below the 20 EMA after a brief rally.  The action has gotten a bit choppy, but if economic data continues to point to weakness, the multiples could contract along with continued revisions to earnings expectations.

You can't think about durable goods without at least considering Sears Holding Corporation (NASDAQ:SHLD).  If expectations for appliance sales have been too high, then there is a good chance that earnings expectations for SHLD will be revised lower as a result of the Durable Goods report.

From a technical perspective, SHLD is completely broken! The stock has experienced unmerciful distribution since its peak in April, and it's recent rally on low volume may now be turned back.  The chart looks ripe for a continuation trade, with the expectation that the stock will at least re-test support at $60 and possibly break lower.

Fundamentally, Sears is still trading at 27 times expected earnings, and the analysts have been consistently lowering their estimates.  Second quarter EPS will be released on August 16 and if management does not do a good job of reinstating confidence,
we could see a full-blown rout.  SHLD doesn't have the same debt issues that plagued the company a few years ago, but economic uncertainty could continue to hit this retailer hard.

Cross currents continue to make short-term visibility hazy.  This means I will continue to keep trade size smaller as I remain in the flow while still protecting capital.

Flexibility, nimbleness, and a constant willingness to re-visit market viewpoints keeps us in the game and bagging profits - Trade 'em well!


Disclosure: Positions in stocks mentioned
Stocks: SLX, MT, X, AKS, HD, LOW, SHLD