After another day of consolidation, this time with a slightly positive bias, the averages are “poised” to do something. Where April marked the top of the market run, as investors moved forward on hope, June marked where investors would price stocks based on fear. Low and behold, the economy isn’t as strong as hoped and the global economic situation isn’t as bad as feared, leaving us somewhere in-between. Dead center of the range for the S & P is at 1115. The NASDAQ is also right at its 50% retracement at 2298. Even the Russell 2000, which is an excellent measure of the “risk trade” component of the market, would be halfway back to its peak at 667. The Dow is clearly doing better, trading a couple hundred points above its mid-point of 10,436. Since these are large-cap multinational companies, they would naturally benefit from a weaker Dollar, which helps to improve their competitive stance in overseas sales. The Dollar Index was trading in a narrow range between 80 and 82 back in April, as the market was making its high. By June, the Dollar was pressing 89 and depressing the Dow. While the economic conditions have also improved since June, the Dollar has now totally erased its April – June rally, trading back at 81. Therefore, the Dow has enjoyed a small margin of an advantage over the broader market indices.
In the category of the economy not being quite as bad as feared, the ISM Non-manufacturing Index, which is a measure of services, rose to 54.3 from 53.8. A decline to 53.0 was anticipated. We’ve seen better-than-expected numbers in the regional and national manufacturing data out of the Fed. Yesterday’s data focused on services and raised a few hopes. An important component was that New Orders increased to 56.7 from 54.4. The manufacturing side showed lower numbers for July, but still above 50, indicating growth. Inventories slipped to 55.5 from 58.5, but are still increasing. Given the focus on employment, the ISM services employment component rising over 50 to 50.9 from 49.7 was deemed another confirmation that we should see private sector job growth. ADP also raised expectations for jobs with an estimate of 42,000 for July. They raised their June estimate to 19,000. Expectations were for 30,000. Overall, the component data for the month have been pointing to some small job growth. Today, we’ll get another weekly claims figure. Analysts are being conservative, looking for consistency at just above 450,000. Last week was at 457,000 and they are looking for 455,000 today. The 450,000 level is considered neutral net job growth when the monthly report comes out.
The FOMC meets next week and investors are digging into comments by Ben Bernanke and other voting members to see what the government might do to combat deflation. Since the Fed is already at a zero interest rate, any measures taken to increase stimulus would need to be by increasing the Fed’s balance sheet. One program being suggested is that the government guarantee mortgages and help skirt some of the nasty, restrictive qualification measures. This would help move banks to refinance those that would not otherwise qualify. If not through mortgages, other means of quantitative easing might be used to prevent deflation. That implication has been helping push up gold and crude over the past week, and put pressure on the Dollar. We did see some stabilization in the Dollar Index yesterday. The index had fallen just below its 200-day moving average on Tuesday at 80.73, but closed back above that level yesterday. The Dollar has fallen nearly 10% in two months and is overdue for a technical bounce.
It’s quite clear that investors are far more content with where the averages are sitting at the moment. That puts pressure on the upcoming economic data to confirm expectations. Earnings are still rolling out, but the impact seems restricted to those stocks reporting and has far less influence on the group, sector, or market. Volume failed to top 1 billion shares on the NYSE and was barely above 2 billion on the NASDAQ. One could say that “conviction” is not part of the equation at this point. Therefore, the move to tuck the averages close to technical resistance points leaves us poised to see a bigger move off of the employment report. On a positive note, the NYSE Breadth Index made a new bull market high! Breadth tends to diverge at market tops. This is not only failing to be the case here, but breadth is actually diverging to the upside. Since we had so many positive earnings announcements over the past few weeks, it is not unexpected to see the Breadth Index strong, but this is an achievement worthy of note. If the S & P is able to get above 1130, the initial target of 1150 is back in play. Investors had to work hard to reverse several negatives that nearly thwarted a summer rally, but the higher we can go, the more of a cushion the market has on the anticipated fall pullback. All we need now is the appropriate catalyst.
After another day of consolidation, this time with a slightly positive bias, the averages are “poised” to do something. Where April marked the top of the market run, as investors moved forward on hope, June marked where investors would price stocks based on fear. Low and behold, the economy isn’t as strong as hoped and the global economic situation isn’t as bad as feared, leaving us somewhere in-between. Dead center of the range for the S & P is at 1115. The NASDAQ is also right at its 50% retracement at 2298. Even the Russell 2000, which is an excellent measure of the “risk trade” component of the market, would be halfway back to its peak at 667. The Dow is clearly doing better, trading a couple hundred points above its mid-point of 10,436. Since these are large-cap multinational companies, they would naturally benefit from a weaker Dollar, which helps to improve their competitive stance in overseas sales. The Dollar Index was trading in a narrow range between 80 and 82 back in April, as the market was making its high. By June, the Dollar was pressing 89 and depressing the Dow. While the economic conditions have also improved since June, the Dollar has now totally erased its April – June rally, trading back at 81. Therefore, the Dow has enjoyed a small margin of an advantage over the broader market indices.
In the category of the economy not being quite as bad as feared, the ISM Non-manufacturing Index, which is a measure of services, rose to 54.3 from 53.8. A decline to 53.0 was anticipated. We’ve seen better-than-expected numbers in the regional and national manufacturing data out of the Fed. Yesterday’s data focused on services and raised a few hopes. An important component was that New Orders increased to 56.7 from 54.4. The manufacturing side showed lower numbers for July, but still above 50, indicating growth. Inventories slipped to 55.5 from 58.5, but are still increasing. Given the focus on employment, the ISM services employment component rising over 50 to 50.9 from 49.7 was deemed another confirmation that we should see private sector job growth. ADP also raised expectations for jobs with an estimate of 42,000 for July. They raised their June estimate to 19,000. Expectations were for 30,000. Overall, the component data for the month have been pointing to some small job growth. Today, we’ll get another weekly claims figure. Analysts are being conservative, looking for consistency at just above 450,000. Last week was at 457,000 and they are looking for 455,000 today. The 450,000 level is considered neutral net job growth when the monthly report comes out.
The FOMC meets next week and investors are digging into comments by Ben Bernanke and other voting members to see what the government might do to combat deflation. Since the Fed is already at a zero interest rate, any measures taken to increase stimulus would need to be by increasing the Fed’s balance sheet. One program being suggested is that the government guarantee mortgages and help skirt some of the nasty, restrictive qualification measures. This would help move banks to refinance those that would not otherwise qualify. If not through mortgages, other means of quantitative easing might be used to prevent deflation. That implication has been helping push up gold and crude over the past week, and put pressure on the Dollar. We did see some stabilization in the Dollar Index yesterday. The index had fallen just below its 200-day moving average on Tuesday at 80.73, but closed back above that level yesterday. The Dollar has fallen nearly 10% in two months and is overdue for a technical bounce.
It’s quite clear that investors are far more content with where the averages are sitting at the moment. That puts pressure on the upcoming economic data to confirm expectations. Earnings are still rolling out, but the impact seems restricted to those stocks reporting and has far less influence on the group, sector, or market. Volume failed to top 1 billion shares on the NYSE and was barely above 2 billion on the NASDAQ. One could say that “conviction” is not part of the equation at this point. Therefore, the move to tuck the averages close to technical resistance points leaves us poised to see a bigger move off of the employment report. On a positive note, the NYSE Breadth Index made a new bull market high! Breadth tends to diverge at market tops. This is not only failing to be the case here, but breadth is actually diverging to the upside. Since we had so many positive earnings announcements over the past few weeks, it is not unexpected to see the Breadth Index strong, but this is an achievement worthy of note. If the S & P is able to get above 1130, the initial target of 1150 is back in play. Investors had to work hard to reverse several negatives that nearly thwarted a summer rally, but the higher we can go, the more of a cushion the market has on the anticipated fall pullback. All we need now is the appropriate catalyst.