Lessons For This Week: Still Safe To Enter This Rally?

Part 1: Daily Breakdown

First, thanks for all the kind inquiries about my absence in recent weeks. Life intervened.

Here in Part 1 we do a brief day by day analysis of key market movers, which serves as a basis for the conclusions and lessons presented in Part 2. If you need to review the key market drivers last week, here’s where to start.


Monday: China Data, Speculation On End of QE Outweigh Good US Retail Data


Asian indexes closed mixed, but the Nikkei continued to power higher to a 5.5 year high, approaching 15,000, as the weakening JPY drove exporters higher, and the rising Nikkei lifted brokerage firms. Chinese indexes fell on a batch of overall underperforming data on industrial production and fixed asset investment – significant figures for a manufacturing and export based economy.

European indexes were also mixed with modest moves in either direction, but Spain was down hard. Concerns about ongoing banking sector problems weighed on bank stocks. Some negative headlines out didn’t help. Eurogroup  President Jeroen Dijsselbloem urged a reluctant France to push forward with reforms (aka very un-French austerity and labor reforms), and George Soros was negative on Italy, noting what he called its perpetual dependence on coordinated action from the EU and ECB, and that its currently low bond yields are likely to rise.

In the US, indexes were flat, as the boost from a better than expected retail sales report was neutralized by the weak China data noted above, which in turn pressured industrial stocks.

However the biggest concern was likely the WSJ report from noted Fed expert Jon Hilsenrath on the prior Thursday that the Fed may be preparing to scale back its bond-buying program. See Part 2 for more on this.  With both global growth and corporate earnings flat to lower, fed easing, and the low yields on bonds that come from it, is widely believed to be the only reason that stocks are hitting new highs. Removal of that last prop would appear to threaten a pullback for stocks that might actually reflect economic realities.

Indeed, in our forecast for 2013 back in January, we concluded that what happened with markets would depend mostly on:

  • Whether assorted stimulus programs stayed in place and continued to prop up markets
  • Prevention of an EU collapse and contagion that would overwhelm any stimulus


Still, the Fed is not likely to make any such moves until autumn, if it does so at all. As the rest of the week would show, the bull market is still very much in gear. Raymond James’ Jeff Saut believes the S&P 500 will hit at least 1,700 by the end of the first quarter. Jonathan Golub, UBS‘s leading equity strategist, wrote in a note to clients that operating profit margins will stay high and could go much higher. In contrast, Morgan Stanley’s Adam Parker warned that earnings expectations continue to fall. “Negative 2013 guidance has driven analyst estimates lower,” said Parker. “Over the past month, analysts have revised down their 2013 S&P 500 estimates 0.3%.”

We don’t expect such sentiments to get much attention while the S&P keeps rising. Adam, why worry? Those lowered estimates will just make it that much easier for firms to beat them when they announce Q2 earnings in mid-June. By then, most investors will have (again) forgotten that these beats came from lowered estimates.


Tuesday: Spain Bond Auction and Tepper Effect


Asian indexes were mixed with up and down moves of varying strength, the most important of which was Shanghai, likely due to a combination of the prior day’s poor data and a China growth forecast cut by JP Morgan

Much of Europe was up, buoyed by a successful Spain auction of 12 month debt notes at their lowest yield in over three years, 0.994% vs. 5% just last June. This and the recent Italian auction at record low rates for recent years affirm continued belief that the ECB will backstop any GIIPS bonds. Certainly the optimism isn’t from Spain’s economic performance, which continues to be awful.

Probably the biggest price booster however, was the same thing that powered US markets higher, the ultra-bullish David Tepper interview. See Part 2 details.

US indexes closed solidly higher, with the S&P 500 up 1.02%. Futures indicated a lower opening, but that was before 8:00am, when the day’s big bullish driver hit. It was bullish comments on CNBC from influential hedge fund chief David Tepper, who was among the first to come out bullish after QE 2, telling markets not to fight the Fed. Since then, when he talks, investors listen. See the Conclusions section below for more on his rational and whether we should believe it.

Arguably the most important event of the day was the USD’s rally along with stocks, which is added evidence that the USD rally has room to run. This is a really big deal because US dollar movements profoundly affect both forex and commodity markets, and for the same basic reason – it can greatly influence prices of the major currencies and commodities. See Part 2 for details.


Wednesday: Reminder of Japan Easing Pros And Cons, Momentum Drives Markets Higher


Asian indexes all closed higher, with the Nikkei hitting yet another 5.5 year high and breaking over the psychologically important 15,000 barrier, fueled by (what else?) a weaker JPY that boosted exporter stocks, as well as by the follow through effect of strength in US markets overnight. Also of note: the 10 year Japanese Government Bond yield rose to 0.92%, its highest since last April. Not a problem yet but the potential risks cannot be overstated. See Part 2 for details.

Japan wasn’t alone in seeing stocks rise due to a falling currency that boosts exports. European stocks ended modestly higher, led by Swiss exporters boosted by a falling CHF. The up day came despite uniformly bad news out of Europe, including disappointing French, German, and Italian preliminary quarterly GDP figures, indicating the EU remains firmly in recession. Not surprisingly, the EURUSD hit its lowest level in month.

Also like Japan, the US saw its major indexes at new highs. US economic data was uninspiring to disappointing, so the increase was due to technical drivers (momentum driven increases aided by follow through effect from Europe and Asia.


Thursday: Negative Data, Fed Talk Bring A Break From Rally Mode


Asian indexes were mixed, with the Nikkei having a predictable modest pullback on the combination downbeat earnings guidance from banks, mixed data, and the temptation to take profits after the index hit new highs.

Europe saw a similar mixed-to-flat day, as negative earnings news, US data, and more talk of the Fed reducing its stimulus program pressured markets and countered the overall momentum driven upward bias.

US indexes were all lower due to a combination of the same factors that weighed on Europe: the Fed tapering of QE talk, and also disappointing weekly unemployment claims, CPI, housing starts, and Philly Fed manufacturing data.


Friday: Positive Data Brings Another Buy-The-Dip Bounce


Asian indexes were mostly solidly higher, with the Nikkei hitting another new 5.5 year high, aided by much better than expected core machinery orders, which were up 41.2% vs. the prior -4.2% and an expected 3.1%.  Today the focus was on reflationary plays like real estate stocks.

European indexes were overall solidly higher due to follow through effect from Asia and strong US data, both of which encouraged the now familiar buy-the-dip mentality after Thursday’s weakness.

US indexes were all up around 1%, hitting new highs yet again. Reuters claimed that the catalyst was a much better than expected preliminary UoM consumer sentiment report. By itself this report is not consistently influential. We suspect this was a just another case of markets focusing on data that confirms an already strong trend.


We cover the lessons and conclusions from above in Part 2.