Stimulus vs Economic Slowing… Who Wins?

Traders want to believe the Fed is on their side in terms of stimulus. If European sovereign debt wasn’t an equal concern, the markets would be moving back towards the previous high on the Fed stimulus belief. However, the two have created a tug-o-war the last two weeks. The current activity is a classic story of wanting to believe in the Fed, but fearing a bigger problem exist. The bigger problem is Europe and the fear is justified for the near term. The vote on Sunday¬†in Greece will keep the markets in check as everyone speculates the outcome. The Italian bond auction today isn’t expected to go well on the back of Spain’s bailout for 125 billion dollars. We haven’t even gotten to the issues with Germany the other EU countries disagreeing over a euro bond to facilitate the bailout money. Yes, Europe is a problem for all, and it isn’t going away anytime soon. What the investment community wants and needs is an understanding of what the potential liability is and how it can or will be handled. Then, and only then, will the markets¬†move forward.

Aside from Europe the economic data continues to be a challenge for the US markets. Lost in the headlines on Wednesday was a weak retail sales report. Sales fell 0.2% in May as gasoline prices declined. In fact, PPI fell 1% on the lower gasoline prices which helped in the wholesale production of goods. Some justified the weaker sales number on the back of what is considered better for the consumer, lower gas prices. The latter part of that statement is true, but the data was still weak taking out the gasoline data. ex-auto sales were off 0.4% in May. Autos were actually one of the better parts of the report up 0.8%. Business inventories rose in May adding to some of the angst about the consumer. In turn the sector dropped 1.5%. The retail stocks fell 2.7%. This has been one of the leading sectors for the broad market, but the data is weakening along with the other economic reports. If the consumer contracts the markets will feel the pinch.

My concern continues to grow relative to the economic data and the fundamental impact on stocks. The recent bounce off the June 4th lows put some hope in play for a better outlook for growth by central bank stimulus. The slowing data in conjunction with Europe may be too much to overcome. The volatility index (VIX) has moved back near the 25 mark and trend higher remains in play. If it jumps higher it will reflect the concern from traders and  investors. We started the week looking for a possible break below support at 21 on the stimulus rumors and hope. Europe has kept that optimism in check, but the mounting economic data showing a further slowing in the US economy is the potential catalyst for a spike higher in the VIX.

When you put together all the data, and weigh it against the upside gains from an announcement of more stimulus, the most you can hope for is a¬†trading opportunity¬†from a short term bounce. The charts reflect the back and forth between stimulus and reality, but you still have to respect the downtrend in play off the April 1st high. The market lacks clarity both from a short term view and a longer term view. Thus, money is rotating to “safer” heavens. As I stated in my notes yesterday, dividend type assets are rising in the scan results reflecting the migration of money away from growth “risk”. For me that is a warning sign for investors.

The move lower in the leading sectors is adding to angst or reflecting the concerns about the market looking forward. Housing, retail, technology and financials have all established new short term lows. What was leading is lagging and money is rotating to the defensive sectors. Utilities, health care and consumer staples have been pushing slowly higher, with utilities leading the pack. Fixed income has seen a positive influx of money and upside as well. BND, LQD, IYR and IEF have all seen positive moves higher. Money is seeking safer ground and the charts are reflecting the move.

I continue to remain cautious and I am more than willing to join those on the sidelines and watch the tennis match of those waging war with the market. Remember, this is about risk management. The investor who manages risk is the one who sleeps at night and lives to play another day.