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The day started very positively on the back of several positive economic reports. But the major indices started losing strength around 11 am ET and just continued to decline, closing near their lows for the day. SPX closed down $13 at $1950, barely higher than its low for the day at $1948. RUT traded in a similar pattern, losing $12 to close at $1173. Trading volume popped up with 2.0 billion shares of the S&P 500 stocks trading today; the 50 dma = 1.9B. Trading volume rose 13% on the NYSE and increased 15% on NASDAQ.
This morning the Conference Board's measure of consumer confidence hit its highest level since January 2008 at 85.2. New home sales rose 18.6% in May to an annualized rate of 504k, up from 425k. The Case-Schiller housing price survey turned in a positive 10.8% increase for April, but that was a decline from March's +12.4%. This economic data bolstered the case for the bulls during this morning's trading session, but then it seemed like it slowly fell apart. I am inclined to think many traders were primed to take their profits, and ran for the exits as the market hit new highs. But several market analysts attributed the market's weakness to the continuing crisis in Iraq.
The question for tomorrow's open is whether the selling spreads.
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This bull market is getting a little long in the tooth, but the bulls remain in charge. Even bad economic news is discounted. The bears have been unable to take advantage of any bad news. Perhaps a large part of the bulls' case is simply the Fed support. As long as billions of dollars are being pumped in every month, it is hard to make the bear case. In addition, one has to consider investment alternatives; where can you put your money to work? It could be argued that equities are the only game in town.
SPX traded slightly down essentially all day, but recovered to close unchanged at $1963. RUT lost $3 to close at $1185. Volatility remains low and unchanged with the VIX coming in at 11.0%, up only a tenth of a point. As one might expect after quadruple witching on Friday, trading volume fell off with 1.7 billion shares of the S&P 500 stocks trading today. But if one excludes Friday's spurt, 1.7B is back in line with recent months, running just under the 50 dma. Trading volume on the NYSE fell 56% from Friday and NASDAQ dropped off 31%.
The only significant economic news today was the annualized rate of existing home sales for May at 4.89 million, up from April's 4.66 million. Tomorrow brings Case-Schiller, consumer confidence, and new home sales. Wednesday brings the third revision of first quarter GDP. A surprise in GDP could move the market, but this bull market completely ignored the first estimate of a negative 1.5% growth. I remain cautious, but one has to play this market from the bullish side until we see it crack.
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Think of this market as your dad sleeping off Thanksgiving dinner on the couch. SPX has had a huge run over the past month, so a little sideways consolidation trading isn't too surprising. SPX opened and ran up to $1941 this morning, but then dove down to $1931 just after noon. Then SPX just chopped sideways the balance of the day, closing at $1938, up $2. RUT behaved similarly, closing up $4 at $1167. Volatility rose just a touch with the VIX closing at 12.7%, up a half of a point.
Trading volume was light with 1.8 billion shares of the S&P 500 stocks trading, still well below the 50 dma. Trading volume on the NYSE rose 8%, but volume dropped 4% on NASDAQ.
The Empire manufacturing index from the New York Fed came in at 19.3 for June, up slightly from 19.0 in May. Industrial production for May reported at +0.6%, an increase over the previous month's 0.3% decline. Capacity Utilization rose slightly in May to 79.1% from April's 78.9% level.
We may see light trading tomorrow as well, since the FOMC announcement is due Wednesday afternoon. I don't expect anything really new from the Fed announcement, but it is hard to predict the market's reactions. It isn't always rational (or at least doesn't match my rationale).
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Quadruple witching resulted in a surge of trading volume with 2.8 billion shares of the S&P 500 stocks trading today. Trading on the NYSE was up 42% and trading volume on NASDAQ increased 35%. This level of S&P trading volume has only been exceeded three times this year. SPX gained $3 to close at $1963 and RUT closed up $4 at $1188. Volatility rose a smidgeon with the VIX closing at 10.9%, probably the result of institutions hedging for the weekend.
There was no economic data of any significance reported today. I found one aspect of the FOMC announcement on Wednesday a little unusual. The committee said the economy is weakening a bit and lowered their GDP forecast to +2.3% for 2014. In light of the 1.5% decline in the first quarter, that forecast requires an average of quarterly growth rates over 3% - that strikes me as extremely optimistic. Perhaps Yellen is a politician after all.
The other disconnect from reality for the FOMC is on inflation. They don't think we have any inflation and have no concerns whatsoever. I'm not an economist, but I know I am paying more for food and gasoline. It doesn't feel like zero inflation to me. Perhaps it is similar to our fudging of the unemployment rate statistics. An unemployment rate of 6.3% really isn't too bad. During my lifetime, I have seen periods of solid economic growth with 6% unemployment. But this economy isn't healthy by any measure; just ask your neighbors and look at all of the empty commercial buildings. True unemployment is much higher than 6%.
SPX set another all-time high today. This bull market doesn't seem right to me. I just can't see the economic fundamentals to drive such exuberance. What worries me is this: history tells us that the higher and more frothy the market trades, the harder it falls. I would really prefer some sideways consolidation trading to cool things off a bit. But, you trade what you see, not what you think should be.
Have a great weekend.
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For the past couple of weeks, it has seemed as though there was no end to this bullish run higher. Then the markets weakened on Tuesday and doubt set in. Thursday brought a significant decline and it appeared as though some degree of a correction had begun - perhaps just a slight decline and mostly sideways trading or perhaps the big, nasty correction so many have been predicting. But the bulls reasserted themselves today with SPX closing at $1936 for a gain of $6. RUT also strengthened a bit, closing up $3 at $1163. These aren't big gains, but it does tend to quiet the "sky is falling" crowd.
Expecting this bull market to continue straight up as it has for the past few weeks is silly. But predicting a severe market crash is an overreaction and ignores some obvious factors. First of all, corporate earnings have continued to grow; companies have been turning in reasonable results - it isn't boom city, but it isn't terrible by any measure. Secondly, and maybe more importantly, the Fed is still very much in this market, pumping in billions of dollars each month.
This discussion is meant to set up the question we are probably all thinking about: is the market going to continue up or correct back lower? I don't have the answer, but I have my own "best guess", for what it's worth. For the reasons cited above, I think the bulls have the edge. However, trees don't grow to the sky, and markets tend to ebb and flow in their progress, whether it is a bull or a bear market. By most measures, this market is fully valued, if not over-valued, so a little bit of a pause certainly would make sense. But this minor pause of the past three or four days may not last. After all, strong bull markets in the past continued higher long after everyone thought they were overbought. And this market has the Fed on its side. So my best guess is a slightly bullish to sideways market.
That is why Ihave been using diagonal spreads for the past several weeks; they seem to fit this market nicely. I also sold a call spread on RUT earlier this week to set up a new RUT condor. If RUT continues higher next week, I will sell the put spread; if not, I will wait.
Happy Father's Day to all of you out there. Enjoy the weekend.
