Good News is Bad News?

The economy grew at a revised 3.6% in the third quarter. That is better than expected and continues to validate the opinion voiced by many about the second half of the year improving. That has been true thus far. The other shoe to drop however, build up in inventory is the reason for the rise in GDP. Thus, looking to the fourth quarter you would expect the inventory numbers to decline from the holidays. If that is true, what pushed GDP higher in Q3… would lower GDP in Q4. Rising inventories help, declining inventory hurt. This will put pressure on the data points going forward relative to growth in GDP.

Weekly jobless claims were 298,000 or a decline of 23,000 from last week. That is only the second time since the recession ended in 2009 we have dropped below the 300,000 level. Positive news for the job market and the economy. Why the selling today? Positive data on the jobs brings the worries about the Fed cutting stimulus back into play. Good news is bad news?

The budget talks that seem to have disappeared from the headlines are about to come back to the forefront as the December 13th deadline looms next week. Both sides are optimistic, but still not near a deal. Higher taxes on airline tickets seems to be a way to get more revenue as they want to double the transportation security tax from $2.50 to $5 starting next year. That would add $11 billion to the coffers. New spending is being considered as well, go figure. No balanced budget component to the proposal, but I keep hoping. This is a potential sticking point for the broad markets moving towards the deadline and year-end if we advance without a new budget. That would bring in the talks on another government shut-down on January 16th.

Major indexes close lower for the fifth straight day! Of course it has amounted to a decline of 1.2% for the S&P 500 index. The headlines read like it is a huge drop for the index, but it’s been a manageable test short term so far. Financials and consumer staples are the biggest losers on the day down 0.9%. The move in the markets is testing the first key levels of support and we are watching to see if this accelerates further on the downside. Still room for the markets to test short term. We remain with our upside bias and watch to see how this unfolds short term.

Moves of Interest Today: 

Gold loses again as the short covering stopped on the jobless claims. They are pointing to a good jobs report… Fed cuts… no inflation… no demand rise… gold falls. The progression of the story around gold will make you dizzy, but the downside has been the direction of choice from my view and each rally has brought opportunities to be short the metal. Enough said.

JC Penny fell on rumors a hedge fund sold their shares in the company. Hard to believe a trader would lock in profits of 30-40% on a position. We stated last night that analyst were not optimistic about the turn around in the retailer longer term. This remains a story line to watch and look for the opportunity up or down as this all unfolds. I still like the upside short term relative to the holiday season. XRT is still attempting to hold the first level of support at $86.50. Scanning the sector ETF we find some solid bounces higher off support worth tracking.

VIX index moved higher again today to the 15.1 mark. Any move higher may spark some more selling. The decline mentioned above has been modest, but there is a rise in concern short term, as a push towards 17.7 – 18 is not out of the question. The discussions around the stimulus cuts and the budget deadline are two events that can add to the stress along with the jobs report tomorrow.

The yield on the 10 year bond advanced again today putting downside pressure on IEF, iShares 7-10 Yr Treasury Bond ETF which fell below support of the $101 level. It also broke the neckline of a head-and-shoulder pattern on the fund. Downside risk to the bond based on the technical data alone is $98.80. PST is the ETF that allows to invest in the inverse of the bond. Thus, flipping the chart would be a breakout higher for the short bond ETF.

Financials have almost erased the entire gain on the break from consolidation three weeks ago. This remains a sector under attack by investors based on fundamental arguments and emotional arguments. The emotional side continues to win as investors, traders, government and just about everyone seems to hold a grudge over the 2008 correction. Throw in the uncertainty of regulations in the sector and it is easy to see why the sector comes under fire on a regular basis. For those who are patient this remains a sector to watch and own long term.

Apple remains a positive in the headlines as they sign a deal with China Mobile as rumored. This will be a long term benefit to the stocks going forward. They could not hold the positive open on the day and closed near the $568 level. Our target remains $595 for the stock. $575 offers some near term resistance for the stock which explains some of the action today. Watching for a test and follow through on the upside as this moves toward our target.

Negative day, but the selling is not aggressive, and depending on how investors react to the jobs report in the morning, this is still a positive trend. Plenty to ponder for investors as the flood of data raises plenty of questions relative to the future. One day at a time is all we can do for now as we maintain our focus and discipline.