*These are our short term thoughts on the market. We combine our medium-long term model and discretionary outlook when making investment decisions. We’re looking at how the market reacts to news, earnings, and other fundamental themes related to the key individual sectors.
Stock index & news
There are several things to note today.
Economic data and Fed rate hike in June
U.S. economic data continues to deteriorate a little. Today’s ISM Services came in lower than expected and Factory Orders shrank.
The data’s recent deterioration should not concern bullish investors. Historically, the economic data does not impact the stock market unless the economy deteriorates SIGNIFICANTLY. We are nowhere close to significant deterioration right now. More on this in a later post.
When the economy deteriorates slightly, it can recover in a heartbeat and without any reason.
For example, every single major economic indicator missed “expectations” in August 2010. Then starting with the ISM Manufacturing data on September 1 2010, every single economic indicatorbeat expectations.
This is why we ignore transitory fluctuations in the data. They’re mostly random. The overall trend in U.S. economic data continues to improve.
However, the recent deterioration might impact the Fed’s rate hike decision on June 14.
- The Fed mentioned the “transitory weakness in economic data” at its March 2017 meeting.
- Since then, the economic data has become even weaker.
The market has set the odds of a June rate hike at 95.8%. We think that’s too high. We think the odds of a hike should be 60%.
We said on Friday’s market outlook that all 3 rate hikes in this rate hike cycle have been followed by a selloff in the S&P 500. If the Fed doesn’t hike rates in June, then this is no longer a short term bearish factor.
Today was a day of extremely low volatility. The main risk this week is still Comey’s testimony on Thursday.
This is a 5 minute bar chart for the S&P. As you can see, the S&P barely moved today.
Trump is on the road this week to promote his infrastructure plan. Right now, the market doesn’t care about his tax or infrastructure plans. This is no longer a bullish factor.
Just look at the infrastructure stocks. Some of these stocks have been sliding for weeks, and they were not able to rise today either.
Here’s Vulcan Materials. After an initial surge in November 2016, VMC has failed to rally.
Here’s Martin Marietta Materials. MLM has been sliding this past month as well.
Here’s Quanta Services. PWR has been falling since late-April.
Here’s Aecom Technology. ACM has been sliding since December 2016.
Amazon and Google
We mentioned in a recent post:
Amazon shouldn’t top at $1000: stocks rarely top at whole # resistances. Instead, Amazon should rise above $1000 before it even has a chance to top.
Amazon is now at $1113. Likewise, Google has broken above its $1000 resistance and is now at $1007.
Tech has been leading the S&P’s rally recently. But the tech sector’s strength today could not lift the S&P higher. Is this bearish for the S&P? Who knows. Historically this kind of correlation has not had predictive value.
Why the S&P will make a small correction and not a significant correction
Our model does not foresee a significant correction on the horizon.
In addition, we are in the final quarter of this economic expansion cycle. Based on our economic projections, inflation should start to pick up in the 2nd half (and especially Q4) of 2017. Hence, energy prices should rise and interest rates should rise.
Oil and rates have been falling recently. But even if they continue to fall, that will probably only be a temporary dip.
The energy and finance sectors have been trying to drag the S&P down over the past few months. They will eventually mean reverse. When oil and rates rise over the medium-long term, the energy and finance sectors will lead the S&P’s rally. The energy and finance led rally should stop the S&P’s small correction from turning into a significant correction.
Here is XLE (energy sector ETF).
Here is XLF (finance sector ETF).
Nothing has really changed. We think the odds of a June rate hike are lower, at 60%.
- Our model still says that this is a “big rally” in a bull market. The optimal decision is to follow our model and be 100% long U.S. stocks.
- We are sitting on 100% cash and waiting to buy when the S&P makes a 6%+ “small correction”. The short term risk is too high. The S&P will make a small correction in the next few months. But no one knows exactly when this correction will begin.
There was nothing important going on in the S&P’s sectors today. Tech and consumer discretionary outperformed (as usual).