Wednesday, May 02, 2012

The Morning Call-Forget the ISM #, stocks decline in a global recession


The Market
Technical


The indices (DJIA 13279, S&P 1405) moved up yesterday. Even though the Dow penetrated the 13302 level intraday, at the close, it and the S&P finished the day within their short term trading ranges (12919-13302, 1372-1422) and their intermediate term uptrends (11543-16543, 1211-1778). They also remain above their 50 day moving averages (13039, 1384).

Volume was flat; breadth improved. The VIX closed down but above the lower boundaries of its short and intermediate term trading ranges.

GLD was off fractionally but continues above the lower boundaries of its short and intermediate term trading ranges.

Bottom line: stocks turned in, what the technicians frequently linked to this note, expected for the first trading day of the month. The Dow 13302 upper boundary experienced its first test and held. I am sure that there will be more; and clearly there is some probability that the upper boundary of the current trading range will be breached. As you know, that is not my conviction based primarily on our Valuation Model and our internal indicator. So I continue to do nothing.

If you just can’t stand not to put money to work, I would wait for either a confirmed break above 13302, 1422 or a retreat to the 12919, 1372 level.

Fundamental
Headlines


Yesterday’s economic data was mixed with March construction spending coming in well below expectations, the weekly retail sales neutral to positive and the April ISM manufacturing number a pleasant surprise. The latter was by far the most significant datapoint; and that was clearly reflected the day’s pin action. That said, in total, the data says nothing new about the shape of the current recovery.

Internationally, the Chinese PMI was up though slightly worse than anticipated. Europe was closed for a holiday.

**Overnight European unemployment rose and PMI fell.

Bottom line: investors spent the day high five-ing over the ISM number and eagerly looking forward to Friday’s nonfarm payroll report. I too was pleased with the ISM figure; but more because it contributes to enough positive data flow to keep our forecast on track---not because it is some omen of an accelerating economy.

Will the US skirt a recession and even if it does, will it matter to the stock market (short and a must read):
http://advisorperspectives.com/dshort/guest/Dwaine-van-Vuuren-120502-Can-US-Skirt-Global-Recession.php

In fact, I was a bit confused listening the steady stream of experts on CNBC yesterday. Everyone was understandably quite upbeat about the ISM report. But in the same interviews, these experts opined that a solid nonfarm payroll number could be bad news for the Market because it could lead to the end of the QE’s, while a poor report could be good news for the opposite reason.

So I ask, how can one get jiggy on a strong ISM number (i.e. the economy is improving, so no need for QEIII) and simultaneously think that a lousy employment report would be a positive for stocks (i.e. the economy is not improving, so we need QEIII)? I don’t have the answer to that question. But I do know that uncertainty is implicit in those seemingly contradictory statements; and that kind of uncertainty doesn’t make me want to rush out and buy stocks.

The latest from Marc Faber:
http://www.investmentpostcards.com/2012/05/01/marc-faber-interview-keynesian-clowns-middle-east-to-blow-up-and-money-printing/

Updates on some valuation measures:
http://advisorperspectives.com/dshort/updates/PE-Ratios-and-Market-Valuation.php
http://advisorperspectives.com/dshort/updates/Q-Ratio-and-Market-Valuation.php




Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder, Stevens and Clark and Bear Stearns. Steve's goal at Strategic Stock Investments is to help other investors build wealth and benefit from the investing lessons he learned the hard way.