Market Moving News (Summary of 18 Articles)
Spending is strong. According to the latest Gallup survey, daily consumer spending reports in the U.S. averaged $94 in July, up slightly from June. Retail sales of back-to-school items were strong and department store sales are up. Chain stores are reporting slightly slower rates of year-on-year sales growth in July but are holding onto sales guidance indicating that the month's sales came in at expectations.
Manufacturing is leading a strengthening economy. The factory sector surged higher in June following a weak May with new orders up a much higher-than-expected 1.1%. The durable goods component was revised sharply higher to show a 1.7% jump, vs. 0.7%. Non-durable goods were up a solid 0.6% following a 0.2% decline in May. 3.3% jump for nondefense capital goods excluding aircraft.
The services sector is strong. The Markit US service sector sample reports continued strong growth in general activity; the index is well above breakeven 50 at 60.8. The July final was 61.0. The July ISM non-manufacturing composite index is 58.7, up 2.7 points from June, which is the strongest monthly growth rate of the recovery.
The trade deficit in June narrowed again after an unexpectedly large narrowing the month before. The trade gap shrank to $41.5 billion from $44.7 billion in May. Exports edged up 0.1% in June after jumping 1.1% the month before. Imports fell 1.2%, following a 0.1% dip in May.
Consumer credit rose $17.3 billion in June and was driven once again by the non-revolving component, which rose $16.3 billion on vehicle financing student loans. The revolving component, important to retailers, rose $0.9 billion following a revised $1.7 billion rise in May. Wholesale inventories rose 0.3% in June, a modest rise in line with a modest 0.2% gain in wholesale sales that leaves the stock-to-sales ratio unchanged at a lean 1.17.
Housing is hurting. Mortgage applications for home purchases fell 1.0% in the August 1 week to extend a long flat trend. Year-on-year, applications are down 14.0% vs a 12.0% decline in the prior week. Applications for refinancing have also been flat though they did rise 4.0% in the latest week. The average rate for 30-year conforming mortgages rose 2 basis points to 4.35%. Mortgage applications for home purchases fell 1.0% in the August 1 week to extend a long flat trend. Year-on-year, applications are down 14.0% vs a 12.0% decline in the prior week. Applications for refinancing have also been flat though they did rise 4.0% in the latest week. The average rate for 30-year conforming mortgages rose 2 basis points to 4.35%.
Unemployment continues to fall. Initial claims fell 14,000 in the August 2 week to a 289,000 level that is 6,000 below the low end of the Econoday consensus. The 289,000 level is just slightly above the recovery low hit in the July 19 week of 279,000. But the 4-week average is at a new recovery low, down 4,000 to 293,500 which is about 20,000 below the month-ago trend. Continuing claims, in lagging data for the July 26 week, fell 24,000 to a new recovery low of 2.518 million while the 4-week average is down 17,000 to a new recovery low of 2.519 million.
Sentiment metrics are mixed. The July 2014 Investor Movement Index for the four weeks ending July 25, 2014 posted a reading of 5.85, compared to 5.67 in June. Gallup's Economic Confidence Index dropped two points in July to minus 17--the lowest index reading since March. Middle- and lower-income Americans' confidence in the economy fell, but upper-income Americans' confidence stayed the same.
According to Bloomberg, Americans' ratings of their own finances and the national economy dipped to a two-month low this week, stalling the Bloomberg Consumer Comfort Index after an early summer advance. While essentially unchanged from last week, the CCI, at 36.2 on a 0-100 scale, has slipped slightly from 37.6 two weeks ago to its lowest numerically since early June.
The VIX hovered around the 16 level all week, an indication that institutions are increasing their use of options to protect their portfolios from a big sell-off. This change confirms my speculation last week that the specter of higher interest rates and geopolitical instability has concerned investors.
The Market (S&P 500)
My guess last week that the market would "the market will head lower in very choppy sessions for the next few weeks" was supported by the action of the S&P 500. The SPY found support at 191, and will need to trade above 194 before we can think about an uptrend. Volume was high, and very high on down-days, an indication that funds are reorganizing their portfolios.
Small Caps (NYSEARCA:IWM)
The most interesting action was among the small caps, which traded in a narrow range and established a small base at about 110.5. Relative to the S&P 500, volatility was somewhat subdued. I am guessing that small caps are less influenced by geopolitics than large multi-national companies, and the IWM is reflecting underlying earnings strength.
The core sector relative strength chart shows the strength of IWM in sharp relief which, in one week, move from the third lowest to the best performer. Lest we be carried away, the change was a low 3%. During trading last week, strength of various ETF's was highly variable-up one day, down the next. Homebuilders (NYSEARCA:XHB) shot up during the week.
Although not shown, IWM outperformed QQQ by about 1% last week.
Best Relative Strength
Among the 36 ETFs I follow, metals (NYSEARCA:XME) stood out. This is probably geopolitical, on news that Boeing and others are stockpiling titanium that they normally get from a Russian company. Homebuilders (XHB) had a spike on Friday. Real estate (NYSEARCA:IYR) is showing relative strength.
Trades Last Week
Holding: AGNC, TAN
Conclusion and Action
The market seems riven by tension between interest rate fears and geopolitics vs. a strengthening U.S. economy. This week's economic news, with the lone exception of housing, contains the strongest reports months.
I'm guessing that economic strength is reflected more in the small caps in small caps (IWM) because they don't react as much to geopolitics and rate fears as large multinational companies. If IWM begins an up-trend, we could see a revival in some segments. Last week that some biotechs and solar had big moves. Healthcare (NYSEARCA:XLV) is likely to recover early. On Friday, notable moves came from XBI, OIH, IBB, PPA, IYT, XLV, and IAK. My current plan is to watch and wait to identify trends.
Have a great week!
Disclosure: The author is long TAN.