Moon Over Manhattan


“I say it is the moon that shines so bright.” “I know it is the sun that shines so bright.” – Kate and Petruchio in William Shakespeare’s The Taming of the Shrew

Investing is so easy, isn’t it? All you do is put your money into the machine and it goes up. If the needle drops for a moment, just drop in some more cash and it goes up back again.

There may be one more week left to this “May Madness,” though it would probably be better for the market if there weren’t. Most of the indices are extended, in particular the Nasdaq, and another weak of gains would almost surely be erased immediately afterwards.

But the momentum train that began with the S&P 500 index bouncing off of its 50-day moving average has been running hard, with the main impetus being the conviction that the market is going to go up almost every day. It’s been up 14 of the last 17 days, so the odds appear to be in favor of that conviction, if you’re a momentum trader.

That’s deceptive, though. If the market is up again next week, you can safely take the short side of that trade. The S&P 500 is nearly 11% above its 200-day exponential moving average, and that kind of altitude makes traders and programs nervous. It should, since it’s usually followed by a pullback, often a testing one. Interestingly enough, every time the index has gotten from 160 to 180 points above the EMA in the last few years, it’s been followed by a subsequent return trip to the average.

The intermediate and long-term indicators on the market are seriously overbought. The 8%-12% correction is still imminent, perhaps made more so by trader capitulation and whispers that maybe the market will go up another 10% first. Not likely.

Take heart, though, because such a correction would be good for the market. When stock prices get too juiced on their own up-today, because-it-was-up-yesterday momentum, it sows the seeds of a crash. If stocks were to keep moving higher throughout the summer, as some are beginning to predict, it would greatly increase the odds of a fall blowout. If you want to see the market higher in October, hope for some air to come out of the balloon soon. The Dow is on its longest run (about 90 days) without a 3-day losing streak since – 1958!

It’s come on light volume too. The move has come almost less on buying conviction than a fear of selling, hence the expression “chicken long.” Leon Black, however, of buyout firm Apollo Management fame, is not afraid of selling. While the Wall Street Journal is celebrating easier credit conditions, Black’s firm is selling “everything that isn’t nailed down,” precisely because credit has gotten too loose again. Junk bonds are below 5%, PIK (pay-in-kind) bonds, last seen in the spring of 2007, have returned and margin debt is nearing its all-time record high again. It calls to mind the old adage – “if it seems too good to be true, it probably is.”

Something else that may be too good to be true is the idea that central banks are going to print equities to heaven. A currency battle is getting underway, though no one in government circles wants to talk about it. Since Japan embarked upon its massive program to devalue the yen – or as the G-20 agreed to pretend, raise inflation – the EU, Australia, South Korea, Vietnam and Sri Lanka have all cut interest rates. More rate cuts are on the way. Here’s a tip – they’re not trying to prop up stock markets.

There admittedly remains the possibility of the lunatic-defiance trade. The market does gets periodic bouts of it, and despite the invariably bad ending, many traders love it. For one thing, it’s simple. For another, the natural inclination of most traders and investors is to be cheering for things to go up. Whether it makes sense or not, it’s a satisfying exercise in self-validation. The notion that all news is good news – because either the economy is better than expected or the Fed is in longer than expected – is creeping back into the discourse. That’s not good for anything but a short burst of short-term profits for traders. The payback always does far more damage.

Bow your head for a moment at the passing of Alan Abelson, Barron’s magazine’s erudite lead writer for decades. He will be missed.

The Economic Beat

The very light week of data had only one monthly release, wholesale sales and inventories, numbers which as a rule don’t have much of a tape impact. This one garnered a bit more than usual, due partly to the lack of anything else, and due partly to the fact it wasn’t very good. Wholesale sales experienced their biggest drop in four years, and the seasonally adjusted inventory-to-sales ratio is at its highest since October 2009.

The drop in sales wasn’t that surprising, as the unadjusted inventory-sales ratio had hit a multi-year peak the month before. The inventory-sales ratio isn’t dramatically higher than the last four years, only marginally. What should concern you is this chart of the year-on-year changes:

That wholesales series looks ominous.

Weekly claims, which came out the same day, were in a different vein, as the seasonally adjusted number was the lowest since before the recession (though it will be revised higher next week). The broader claims trend has been zigzagging the last six months or so. The rate of yearly improvement dropped off late in the fourth quarter to about half its rate of roughly 10%, but after several months of about 5% improvement it has lately trended back to 10%. I’m almost afraid to say so and bring back another surge in claims.

The rising stock market has beguiled the media into any number of misstatements. I heard one Bloomberg reporter gushing about that great April jobs report – it wasn’t by any standard but the market fearing something worse after a disappointing ADP report (to give credit, Journal writers have been throwing some cold water on the notion of late, going so far as to call it “weak“).

Others are talking about increases in job openings and hiring, but it isn’t true. According to the latest Labor Department survey (the JOLTs survey), the number of job openings in the first quarter of 2013 was down from the first quarter of 2012. The difference was quite small, but it wasn’t positive. The number of jobs added in the first quarter and through the first four months of 2013 are less than the similar periods of 2012, and the “quits” rate, which is thought to be a good indicator of labor confidence, is unchanged over the last twelve months.

But the stock market is up, so everything must be better, or else it wouldn’t be up. It stands to reason.

Monday will bring the April retail sales report. The weekly reports were modest at best. The small number of chains still reporting monthly sales were on balance better than plan, but since chains that struggle drop out of the sample, it’s hard to draw too much inference from the small sample. Mass-market drugstore chains Rite-Aid (RAD) and Walgreen’s (WAG) missed estimates, but the market dialed in on Gap (GPS), which beat estimates again. The consensus is for an easy-to-beat negative number, though +0.4% excluding autos and gasoline.

Small-business confidence comes out Tuesday, with consumer sentiment on Friday. In between are a goodly slate of useful data. Wednesday is the day of the week, with April industrial production and producer price index (PPI), and the May New York Fed survey and homebuilder sentiment index.

The last item is usually a good tip-off to housing starts, which come out on Thursday, along with the Consumer Price Index (CPI) and the Philadelphia Fed survey for May. Both Fed surveys are expected to show a slight rebound from weak, but still positive April results. The Leading Indicators wraps up the US week on Friday.

There will be some market-sensitive data coming from overseas: Chinese industrial production and retail sales figures are due out over the weekend. EU data on tap includes industrial production (Tuesday morning) and the initial GDP estimate (Wednesday).

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