Cold Reality Meets Rosy History
Market Trend:
Possible short-term rally with longer run murky
Sector Watch: Semiconductors and Retailing
Risky Play: Buy QQQ, SPY, or SMH into any sell-off
The Broad Market
Outlook
This
coming week, cold reality will battle it out with rosy history.
History says that about 70% of the time the market rallies
the week after Memorial Day. And based on
at least a few technical indicators, e.g., the VIX, the market does seem due for
a corrective short-term rally.Â
But cold reality suggests that the prospects
for a strong recovery now read like a bad weather report — increasing
cloudiness with a chance of rain. The
problem is certainly not the consumer, who has been buoying the economy with
solid spending. Instead, it’s the
sagging “animal spirits†of business executives who simply don’t want to
bring their capital investment dollars to the party.
Last Friday’s downward revision of the GDP numbers — which hit the stock
market hard — was a stark reminder of this problem.
Indeed, it is now generally understood that the seemingly robust GDP
growth of more than 5% is actually less than 2% when you strip out the effects
of businesses simply rebuilding their inventories — as opposed to actually
moving product.Â
And here is what is perhaps most troubling. Two sectors —
semiconductors and retail — which are supposed to lead us from the late bear
market wilderness into the Early Bull promised land are now tanking.
At best, this signals a weak economic recovery.
At worst, a full blown double-dip recession.
Accordingly, weight towards cash until this Janus-faced market truly
reveals its intentions.
The Macro Data
Market Movers
Major reports of the week include:
Personal Income, Consumer Confidence, and Existing Home Sales on Tuesday,
Semiconductor sales on Thursday, and Productivity, Consumer Sentiment, Factory
Orders and the Chicago Purchasing Manager’s Index on Friday.
Any surprise drop in the consumer confidence measures which are supposed to hold
firm will hit the market hard. Prepare
for a possible significant downward revision of the blowout 8.6% productivity
estimate that goosed the market when it first came out — and a collateral
negative blow to the market.
On the upside, if either factory
orders or the Chicago PMI come out above the consensus estimates, the markets
will happily embrace the news as a signal that the business side of the equation
may actually be improving. Ditto for
semiconductor sales, which are not normally a main stage event, but at this
critical juncture will be of interest.
Sector Watch
Get ready for a retail sector short.
Plus, keep your eye on the inversely correlated ties that bind between
the broad stock market indices, on the one hand, and both the housing sector and
the bond market. Both housing stocks and
the bond market have become safe havens for stock market investors.
At this critical juncture, every drop in the stock market signals a
weaker-than-expected economic recovery and thereby further postpones the day
when the Federal Reserve once again will begin to raise interest rates.
This is good news for both bonds as well as the housing sector that
thrives on low interest rates.
If you
have a favorite macroplay or stock you would like us to consider in this column,
send an e-mail to peter@peternavarro.com
or go directly to https://www.peternavarro.com.Â
We’d love to hear from you.  Â