View From the Hill 29 September 2014
by J. Clinton Hill
The stock market continues to show resiliency but it is coming upon some pockets of turbulence in the investment world. While a strong dollar is something to be proud of, one should bear in mind that pride cometh before the fall, a fact in which U.S. multinational corporations and conglomerates are well aware. Europe and Japan are literally tapping out on the mat and China’s growth trajectory is somewhat tenuous as it crosses into uncharted waters by transitioning from a manufacturing economy to a consumer and service driven growth model. With that being said, the U.S. is the “good” amongst “the bad and the ugly”.
From a longer term perspective, the old equities bull is still kicking up plenty of dust. However, the SP500 is presently experiencing an orderly short term correction within its bullish channel. In plain English, the recent high has established resistance for the upper channel and now we must arrive at a higher level of support for the lower channel to sustain its uptrend. Think of the above as a dance between bulls and bears with the bulls leading and the bears following the beat to settle for higher lows each time they move. At some point, the bears frustratingly capitulate and and then a bullish chaos occurs on the dance floor. The market, like a drunkard who has consumed too much punch, lacks the ability to make any coordinated orderly moves. The dancers are staggering all over themselves and each other. Then suddenly the music stops and there is a “singularity’ moment of clarity and everyone simultaneously rushes for the single exit in a panicked frenzy (which by the way is the exemplary inverse of what occurred before reaching the bear market low of March2009).
This is when we will know that the end is near. I know it sounds counterintuitive, but I’ve studied and meditated over charts and market cycles over the years and not much has changed. Life can be observed through a series of patterns and cycles, which are a key component to understanding human nature’s struggle with the process of progress and evolution. Below is a summary of the key events which impacted this past week’s trading and may also influence the nearterm.
- U.S. PMI Flash Manufacturing Index for September 2014 showed a relatively strong reading @ 57.9 vs. previous @ 57.9 and consensus @ 58.0. Key components of the report, e.g. new business, backlog orders, export sales, and employment, also indicated robust strength.
- China PMI Flash Manufacturing Index for September 2014 made a 2month high @ 50.5 vs. expectations @ 50.0 and previous @ 50.2. The report counters concerns for China’s contracting economic growth.
- U.S. GDP for Q22014. As expected by most economists, the final revision showed that the U.S. economy expanded by 4.6% vs. prior @ 4.2%. It reflected the fastest pace of quarterly economic growth in 3 years and is reflective of the increased business investment and manufacturing.
- U.S. New Home Sales for August 2014 improved substantially to 504k vs. previous @ 412k and consensus @ 430k.
- U.S. EIA Petroleum Status Update for the week of September 19, 2014 surprised the market with a drawdown as the actual inventory for the nation’s crude oil supplies came in @ 4.3mm bbl vs. previous @ +3.73mm bbl. With refineries operating at 93.4% capacity, the economy is clearly not showing any signs of contraction yet.
- Making geopolitical waves, Iran’s Oil Minister said that OPEC should act in concert to stop the slide in crude oil prices which are presently under $100 per barrel. Many had anticipated the disruption in Iraq’s supplies due to Islamist militants would have pressed prices upward, but Libya has increased its production to 925k bbl/day, which is more than a 500k increase over the last two months. Despite Saudi Arabia’s position as the swing producer, it reduction in production has had little effect as Kuwait and the United Arab Emirates have also increased their production supplies. On the surface the uncoordinated efforts of OPEC may seem bearish for oil, but I believe the group’s ultimate realization that member cooperation serves every OPEC member’s best interest will prevail.
- U.S. Consumer Sentiment for September 2014 has remained relatively strong for the past 14 months at a high 84.6 vs. prior @ 82.5, according the the Reuters/Univ. or Michigan survey.
- Positive earnings reports from bellwether stocks positively impacted the market: Nike (NKE) with 27% growth and 24% upside surprise.
Central Banks / Monetary Policy
- EU M3 Money Supply for August 2014 increased 1.8% vs. previous @ 1.5% and consensus @ 1.8%. Until there are legitimate signs of economic recovery, one can expect this to continue, which, by the way, is bullish for the U.S. Dollar index.
- U.S. Money Supply for the week of 9/15/2014 grew by $7.4bn vs. previous @ $25.1bn and consensus @ $18.4bn.
- Existing Home Sales for Aug2014 contracted 1.8% m/m and 4.5% yr/yr. The report showed actual sales @ 5.05mm vs. previous @ 5.15mm previous and consensus @ 5.18mm. Economists attributed the soft numbers to limited housing supply on the market, a soft job market, lack of first time home buyers and the declining number of distressed sales.
- Japan’s latest CPI reading for August 2014 showed inflation increased @ 0.2% vs. prior @ 0.0%, which is well below its target rate of 2% and underscores the consumer weakness in its economy.
Manufacturing and Services
- Europe PMI Composite Flash Index for September 2014 indicated some deceleration in the EU region @ 52.3 vs. prior @ 52.8 and consensus @ 52.5. Germany reported 54.0 vs. prior @ 54.9 and France reported 49.1 vs. prior @ 50.0.
- France’s GDP for Q22014 remained flat @ 0.0% vs. previous @ 0.0% and mainly underscored the lack of growth endemic within the EU region itself.
Current Business Conditions and Expectations
- Germany’s latest Economic Sentiment for September 2014 continues to decline @ 104.7 vs. prior @ 106.3. Current Conditions are @ 110.5 vs. previous @ 111.1 while Business Expectations dipped below 100 to 99.3 vs. previous @ 101.7. ETF Weekly Summary of Capital Markets
*Please note that we will be expanding our ETF universe coverage over time. For your reference, “TWS” is a proprietary indicator developed by Hillbent that measures relative strength in a weighted manner over various time frames. “Vol %” compares weekly volume to average weekly volume and changes are expressed in percentages.
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