Jim’s Notes – Markets Test New Highs

Moving the Market – May 16th

The indexes started higher but reversed directions with some money on the move. This raised the question of how far the current trend can go. The move higher offers the opportunity to take some profits and see how it unfolds, but the activity is normal relative to a run to new highs and a test of the move. The test, if it unfolds, would offer opportunities to pick up some positions that are attractive technically. That said, Thursday offered more weak economic data. Housing starts were up versus the month prior but missed expectations, permits were lower, import prices jumped more than expected waving the inflation flag, and the Philly Fed manufacturing survey was nothing short of ugly. Industrial production fell to 0% and was dismissed following downward revisions from the prior month. All of this data gives ammunition for the Fed to cut interest rates by September just in time to save the election. Initial jobless claims and continuing claims continue to be a fairy tale. Overall everything is playing out just as hoped by those who want to keep the system alive. As I stated yesterday inflation is alive and well but those in power continue to pontificate how good things are. Additionally, no one seemed to be interested in discussing the import price index jumping 0.9% in April. Even minus fuel it was up 0.7% versus 0.1% a month prior. It shows we are additionally importing inflation. It all raises the question as to why the market finds this data palatable. For the simple reason already stated, it offers optimism that the Fed will consider cutting interest rates. This mission is all political. A cut in interest rates of even 50 bps would not change the economic landscape for months at best. And what about the rise in money supply seen in M1 and M2? Liquidity is already in play from the Fed and Treasury. That liquidity, by the way, has inflationary repercussions. The broad indexes started lower, rallied to positive, then faded closing with modest losses as the new highs were tested. Now we turn to the end of the week to see how the storyline unfolds for now.

The major indexes closed the day slightly lower. I would like to blame the data for the move but the data was more of what analysts want to push the rate cut decision by the Fed. The likely culprit for the selling was good old profit-taking. Nothing wrong with that as we have banked some gains and continue to look for the opportunities presented. Leadership was nonexistent as 10 of the eleven sectors closed in negative territory. The direction short term is higher as we bounced off the April lows to new highs The NASDAQ closed down 0.2%, DIA was down 0.02%, and the SP500 was down 0.2%. The major indexes closed slightly lower on the day. The SOXX was down 0.5%. Small Caps (Russell 2000) were down 0.7%. The ten-year treasury yield was 4.37% up 2 bps for the day. Crude Oil (USO) was up 0.5%. (UGA) was up 1.5%. Natural gas (UNG) was up 3.2%. The dollar was up 0.2%. Plenty to deal with moving forward as we manage our money and emotions relative to the current environment.

Friday Outlook: Broad indexes await more economic data and retail earnings. New highs in the large cap indices offers an opportunity for some profit-taking before the weekend. The leadership has shifted back towards growth stocks in an environment that points more to defensive or value stocks… thus, the facts don’t matter currently, only what analysts and traders think, or the memes! 1) Watching the dollar, gold, interest rates, and crude oil. Commodities are mixed and seeing some rotation. 2) Mega caps have been lagging, and if we are going higher they will need to participate in leadership. 3) SPY and QQQ testing new all-time highs. 4) TLT, EFA, and EEM see the rotation of money flow into the sectors. 5) SOXX moved above the $222.25 level… resumed leadership? 6) XLF, KBE, KRE adding to the upside breakout. 7) XLY is lagging showing a slowdown in the consumer.

Chart of Sectors: The scatter chart below shows the activity of the sectors relative to the S&P 500 index. The red down trendline was broken and the leadership is clear. IYZ, XLF, XLK, and XLV are taking the leadership role. Watching how this unfolds moving forward.

Charts to Watch: See Notes on “Reality of the Markets”

Headlines Worthy of Note:

WalMart rose 7% beating earnings and revenue numbers for the latest quarter. The story in the story was what drove the earnings beat… high-income consumers. Yep, you heard that right. The reason is grocery store prices. Everyone is looking for lower prices on food and with their buying power they can offer just that. Success comes with warnings however as analysts see this as a dangerous issue looking forward.

Record number of people taking out a debt relief order in April. More stress showing globally for the consumer.

Could Novax become the next Moderna? Worthy of a read.

Quote of the Day: “If you ask me anything I don’t know, I’m not going to answer.” — Yogi Berra.

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