What Do the Numbers Say?

The market movement on Friday was credited to the concerns in Greece. Despite the agreement to continue the bailouts the measure needed to be approved by the Greek parliament. The riots that erupted as a result of the agreement led some to believe the agreement may not gain approval. Thus, fear ruled the trading day. The vote over the weekend to approve the austerity measures has been met with a positive move in the global markets and the US markets equally moved higher on Monday. You know¬†that could not be the end of the story… The downgrades by Moody’s on¬†Spain and Italy were announced Monday night. Throw in the negative¬†rating on France, UK and Austria and you have some more coal for the fire. This development along with the headlines relative to the markets being overbought are leading to an interesting decision point for the market indexes short term. To that end let’s cover some data points or facts and you can draw your own conclusion.

First quarter earnings growth have been lower to essentially zero from 8% last September. This is not congruent with stock activity. The S&P 50o index has risen 25% since then, while earnings expectations have fallen. Could this be gamesmanship by the analyst to make it easy to beat earnings? Is there something in the data we are all missing? To this point in the quarter there has been no hard evidence relative to a significant slowdown relative to earnings or the economic picture. The potential for “surprise” upside remains in play for the broad index based on analyst expectations. We don’t report the numbers, but we have to understand how the game is played by those who do.

Is the market overbought? I love this terminology! It is important to understand that overbought indicators are just that, indicators. They can remain in an overbought or oversold reading for extended periods of time. In addition, they can do so without a rational reason. That said, acknowledge the reading and technical indicators, but let them make the final decision. The charts will do that. When the trend changes you will know plain and simple. Until then the trend is your friend.

Is China ready to lead the global economic picture again? Looking at the charts the gains in FXI, iShares China FTSE/Xinhua 25 Index ETF has gained nearly 45% based on the improving economic data. They have avoided the dreaded hard landing and the optimism has returned to the investment cycle. Right? The move higher has not been a result of optimism in China, but rather optimism in the US. The interesting part of that twist is that the data in China has improved. The small business manufacturing PMI has moved from 45.7 in September to just over 52 in January, which was the highest reading in over a year. The data shows a gradually expanding economic picture similar to the US. China is in play from a global perspective and could add some additional growth output for the US markets as well.

Jobs are another key indicator for economic expansion or growth. The initial claims data has been improving with the key indicator dropping below the 400,000 initial claims filed. The unemployment rate has fallen steadily and is approaching the 8% level for the first time since 2008. This is a positive data point for the economic picture to improve as wages increase, first by more people employed initially and higher wages over time, thus spending will increase from the consumer. Positive data for continued economic growth. From an election process, lower unemployment is good for the incumbent and would lean towards re-election of the current administration. That factor will be put into the longer term data picture as well in the coming months.

Finally the cash on the sidelines is making its way into the equity markets. The positive flow to equity mutual funds is on the rise according to Morningstar data. Hedge fund deployment of cash has risen steadily over the last six weeks. The “risk-on” trade has been rising and that is driving the overall market higher. There is no slowing currently and that has many, including me, waving the caution flag. The trend is your friend, take it for what it will give and keep moving forward.