Key Factors Driving the Market

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Includes: AAPL, BAC, C, CAT, CIT, DIA, EEM, EFA, GLD, IBM, IEV, INTC, MS, OIL, QQQ, SPY, TXN, UDN, USO, UUP, WFC, XLF
by: John Furlan

Below is a brief current snapshot of what I believe to be the key factors currently driving stock markets. The factors are listed in terms of how I view their impact on the stock market, starting with most important.

So, the first three are the traditional ones of earnings growth, interest rates, and market sentiment (risk premiums). The fourth, leading economic indicators, is something I have heavily emphasized in my approach.

The order of the other factors is more transitory in their importance, e.g. technology stocks have been leading the U.S. market in 2009, but that won’t always be the case.

The ratings before the factors are my opinion of the market’s current view. They can change extremely quickly in the dynamic market/business/economic/political environment, so I will try to update this format at least every mid-week.

Because of the very fluid investment situation, I apologize for not giving direct trading suggestions, which could be very misleading by being quickly superseded.

Comments are greatly appreciated, especially in the form of constructive critical inputs on these factors and others that you feel are important.

For those who may view this checklist as too bullish right now (again, I want to emphasize the very fluid nature of the list), you may want to read a longer article I wrote on July 19.

Hopefully that article should give you a better feel for “where I’m coming from” in my market views. E.g. I am quite familiar with, and have great respect for, thoughtful bearish views that helped foresee and illuminate the financial crisis.

+ Earnings: Main theme so far in 2Q earnings season is cost cutting helping margins, with main concern over what will drive revenue growth; at the moment the former is trumping the latter; bears counter with 'can’t cut your way to sustainable long-term growth'; key issue, how to get to $75 for S&P in 2010.

+ Technical/Sentiment: S&P flirting with key resistance at its June 11 intraday high 956, failure to hold above could result in reversal; breaking above could cause under-invested PMs; retail investors caught flat last 10 days, very anxious (career-wise for PMs, retirement savings for boomers) about chasing a low-volume, very overbought market.

+ Interest rates: 10-year yield of 3.55% under 4% early June peak, as inflation concerns about Obama deficit and Bernanke’s exit strategy have receded somewhat; another in endless round of huge T-bond auctions tests international demand again next week; composite indexes of financial conditions (spreads, etc) fully recovered from last September collapse.

+ Leading indicators: ECRI WLI in strong uptrend since Mar 6 low (same as SPX), my 4-week change “second derivative” of its annualized growth rate (agr at 5-year high) positive but down a little the past 3 weeks; OECD area CLI up last three months (thru May)

+ Technology stocks: QQQQ continues as U.S. market leader, on positive 2Q reports from AAPL, INTC, IBM, TXN, etc, mainly due to better-than-expected margins.

0 Financial stocks: XLF continues to lag below its early May high; GS blow-out offset by reports from BAC, C, MS, WFC, regional banks; commercial real estate, credit card concerns; CIT; can market be driven higher by technology/cyclicals without financials too?

-- Employment/Income: Both remain very weak; bulls say jobs are always a lagging indicator, bears that this cycle’s different, due to impact of employment on deleveraging households; seasonal adjustment related to auto employment muddled initial jobless claims.

++ China: Growth estimates raised this week to 9-10% GDP, peaking higher in early 2010; Shanghai Composite straight up the past month; property boom; new IPO’s very oversubscribed; money-credit growth of 28-34%, concerns about exit strategy popped up in government bill sales

0 Housing: Sales seem to have stabilized at a very low level, existing home sales today (4.83 m consensus) the next read; stalemate for now, bulls tout affordability, new home sales well below household formation, bears high inventory, upcoming option arm resets.

+ Economy: Same key issue as earnings, what (asset bubble?) will drive economic expansion after inventory cycle recovery; PIMCO’s “New Normal” 2% sub-par long-term growth current consensus; Roubini, Goldman around 1% for 2010 GDP, consensus around 2.5% but final demand under 2%.

+ Cyclical stocks: CAT opened up on good margins, then retraced some on lackluster rev outlook on call, typical of earnings/economic issues mentioned above.

+ Emerging markets: With China (see above) leading, these markets have far out-performed developed in 2009, how much further can that gap go, can they decouple; imminent concerns about Eastern Europe seem to have receded.

0 Dollar: Would breaking key support around 78 be positive sign of less risk aversion for “safe haven” trades, or puts Fed in tighter spot on its easy money policy?

+ Oil/Commodities/Gold: Hedge fund and retail trading vehicles, price below $70 positive for economy, stock market.

0 Europe: Eurozone PMI and German IFO on Friday are the next major read on whether economy is finally bottoming.