A Gentle Squeeze


“The fox condemns the trap, not himself.” – William Blake, The Marriage of Heaven and Hell

Classic stuff, last week’s action. Classic for Wall Street, anyway. After some fresh, prominent warnings about looming corrections the week before, prices answered by floating higher most of the week in a kind of miniature short-squeeze. The whole affair was triumphantly topped off by some light Friday buying that met no resistance at all as Wall Streeters cleared out for the long weekend, and the S&P managed to drag itself across the 1900 line with a few cents to spare.

I still say it’s a rally to sell, even as I have no problem conceding that a combination of mild short-squeezing and momentum follow-through could push the index up to the 1925 area. The problem is that even though a bit of weak momentum is on your side, the upside is still quite limited, while the downside line of support is much further off. Last week I wrote that these are rallies to sell into, and stand by that still, even if there’s a bit of a wait while traders finish trying to ambush people who took “sell in May” too seriously.

The “rally” was symptomatic of a market that is expected to correct but is going to be stubborn about doing so without a catalyst. It’s the kind of thing that sometimes develops into another episode of “climbing the wall of worry,” but really it’s nothing more than helium lacking a pin.

The week opened with a dearth of bad news and ended with one, symbolized by Vladimir Putin’s circumspection about what he and his fellow plutocrats intend to do next with Ukraine and its elections. It appears that he wants to press ahead for guarantees that the Ukraine cannot ever become a member of NATO, leaving the West with the unpalatable choice between formally reneging on its principles of liberty, or informally reneging on them by standing by with severely disapproving frowns as Russia absorbs the Ukraine.

But who can say? Ukraine does have an election on Sunday, though the country’s eventual status could remain in doubt for months. The next two weeks will bring lots of data and events, ranging from news on GDP to the jobs report to the ECB’s next meeting. The stock market remains vulnerable, but needs a reason to sell off first, a better one than lots of people worrying aloud.

In the interim, I wish an enjoyable three-day weekend to those who are able to profit from it, and the reminder that all American financial institutions, including the stock market, will be closed on Monday the 26th.

The Economic Beat

The main rally of the week consisted of front-running the release of the FOMC (monetary policy committee) minutes from the April meeting of the Federal Reserve. Like Fed meetings themselves, the trading tendency is now to rally in advance of the actual event.

I don’t like reading the Fed minutes as a rule; they undermine my faith in the institution. Throughout the years, I have been reading that “some participants” have expressed concerns about various matters, only to see them invariably waved off by the majority: “Some participants expressed concern that Goldman Sachs senior management were seen running for the airport in false mustaches while carrying gold bars, but the committee concluded they were probably going to a party and voted to wait twelve months to see if they came back.” That kind of thing.

I wonder if the Fed is trying to let us know that it’s aware of such matters without wanting to roil the markets, or if it’s the more mundane reality that the bank’s realists are always outnumbered by the ivory tower dwellers. I suspect it’s the latter, but have no inside knowledge.

At any rate, the committee is still trying to have it both ways by predicting a long horizon of policy accommodation for an economy that needs it – and by the way, growth is about to take off. That makes my head hurt too, but the stock market sure seems to love it. The first-quarter zero-or-less GDP is still getting blamed on the weather and the second-half recovery spiel is still intact, all attributed to soft intangibles like confidence, a party guest that never seems to remember what it was supposed to bring.

There may be less fiscal drag this year, as the Fed keeps observing, but there is also a smaller contribution from housing. New home sales beat estimates – what a surprise – but despite the silly headlines talking about “spring momentum” (do these journalists even read the report?), the sober truth is that April 2014 sales are down 4.6% from a year ago, and year-to-date sales are down 2.6% through the first four months. The upward revision to March that was congratulated any number of times came at the expense of January and February sales: First quarter totals were unchanged.

Existing home sales checked in with a 4.6 million unit rate, annualized and seasonally adjusted. The rate is nearly 7% below April 2013, leading the realtor’s association to throw in the towel and concede that this year’s home sales will be below last year. Apparently they don’t know about the weather. All-cash sales remain a very high 32%.

The Chicago Fed’s activity index showed a sharp decline in April after a revised big gain in March, leaving the current measure negative (-0.32) while the 3-month moving average turned positive. It’s an index that gets quite a bit of revision these days, but the general trend has been the same for a few years now, which is to say a pattern of subdued oscillation around the zero line. The Kansas City Fed turned in a good manufacturing survey result (+10, 0 is neutral), while the China advance PMI reading attracted a rally by being less negative (49.7).

Weekly claims data suggest a good jobs number for May, but one much closer to 200,000 than last month’s big surprise. Retail sales seem to be picking up, suggesting that the weather rebound was more in May rather than April, which wasn’t cold but wasn’t warm either.

Next week’s abbreviated calendar is a heavy one, with several regional manufacturing surveys (Richmond, Dallas, Chicago), housing reports (March price data, May pending home sales), and two key measures of output: April durable goods orders on Tuesday, and the first revision to first-quarter GDP revision on Thursday. Consensus for the latter has fallen all the way to about (-0.5%), so any smaller negative might be viewed as a victory. Zero would probably ignite an equity rally.

Happy Memorial Day.

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