Review Of The Stock Market’s Monday Performance
The S&P 500 was down 0.76% right after the open on Monday as it looked like the stock market was going to have an awful day. Instead, that was the low for the day; the market was in an uptrend from that point on as the S&P 500 only closed down 0.21%. The Russell 2000 had a great day as it was up 0.51%. The Russell 2000 is on an amazing run as it is up 3.6% month to date and 15.62% since February 8th. The S&P 400 was up 0.14%; it’s slightly below its record high.
As I mentioned, the S&P 500 could use a few down days to become less overbought. The CNN Fear and Greed index is now at 61 which is lower than a week ago when it was at 65. To be clear, the overbought and oversold signals are only guideposts. The small caps and the mid-caps are much more overbought than the S&P 500, yet they continue to move up because of the strong dollar.
Tech, telecom, and energy were the only winning S&P 500 sectors as they were up 0.26%, 0.35%, and 1.12% respectively. When I discuss the oil market, it will explain whey energy stocks rallied. The consumer staples and telecom stocks were the worst performing sectors as they were down 1.48% and 1.97% respectively. With this sector action, it’s like a ‘risk on’ trade without the rally in the overall market.
Usually the consumer staples and telecom sectors fall when treasury yields rise because they pay high dividends. Even though yields are flat in the past 24 hours, they went up during the trading day, especially in the morning when these two sectors fell. I think this action in these sectors is also a correction from the recent trend which made them overbought. Consumer staples were up 3.79% from June 1st to Friday and telecom was up 5.48% from May 29th to Friday.
The main reason the financial press gave for this moderate weakness in the big cap stocks was trade jitters. The $50 billion tariffs China and America put on each other are disconcerting. On the other hand, the media seems to claim trade jitters are the reason for almost all the recent selloffs; then the headlines change if stocks rally. It’s a convenient excuse when they don’t know what is driving stocks. It’s possible the negative earnings revisions I mentioned in a previous article are hurting equities.
Oil, The Dollar, & Treasuries
WTI oil was up 1.2% to $65.85 as it trades in a narrow range, waiting for the OPEC meeting Friday and Saturday. There has already been a large gap between Brent and WTI in the past few weeks. China’s new trade restrictions could cause the gap to widen as the shale producers won’t have a buyer for their exports. The gap peaked at $9.73 on Monday. Goldman Sachs is bullish on oil because of the supply glut and expects OPEC and Russia to add 1 million barrels per day to production by the end of the year and another half a million in 1H 2019.
The dollar was down slightly as it closed at $94.75. It is at a very important technical level as it never closed above the May 29th high of $94.83. It’s curious that during the period consumer staples and telecom rallied, the dollar fell slightly. There are many of factors which affect both markets.
The 10 year and 2 year treasury yields were both flat. Both moved in sequence as their yields were down in the pre-market, rallied when the stock market opened, and then fell in the afternoon. The latest difference between the two bonds is 37 basis points; I remain laser focused on the curve.
Slight Strength In The ECRI
On the one hand, the ECRI commentators have been wrong to claim growth is slowing since Q2 GDP growth is about to be at least 3% and possibly above 4% if June is a good month. There will always be both a bullish and bearish cases for future growth, but there’s little question, the current growth is strong. ECRI has been on the ‘growth slowing’ band wagon for about 8 months. On the other hand, the ECRI index itself has indicated Q2 growth would be strong based on the spike earlier this year. The latest reading from June 8th shows growth accelerated slightly from 2.6% to 2.7%. I’m interested to see if the growth deceleration in the 2nd half of 2018 is as strong as this index suggests.
Weak May Industrial Production Report
The industrial production report was weak, but skewed because of the big decline in autos. This means the GDP models’ estimates will fall; some, such as the NY Fed model, already include this data. The Tuesday Atlanta Fed Nowcast will include this report. I’m explaining the reason for the weakness in the industrial production report to help you understand why stocks didn’t tumble on Friday because of this report.
Specifically, month over month production fell 0.1% which was 0.2% below consensus. Month over month manufacturing was down 0.7% which was 0.8% below estimates. Finally, the capacity to utilization rate was 77.9% which was below the consensus for 78%. The best parts of this report were the positive revisions for the April report as production went from 0.7% growth to 0.9%, manufacturing went from 0.5% to 0.6%, and capacity to utilization went up from 78% to 78.1%.
Excluding the drop in autos, this still wasn’t a good report. Excluding autos, manufacturing fell 0.2% month over month, which would’ve still missed the overall consensus. Hi-tech production was up 0.2% and business equipment production fell 1.1%. Production of primary metals fell for the 2nd month as it is being hurt by the tariffs. Mining was up 1.8% month over month and 12.6% year over year. Manufacturing was only up 1.7% year over year. Utilities were up 1.1% month over month and 4% year over year. Essentially, everything not touched by oil was weak. Capacity to utilization for mining was 92.4%. It was 79.4% for utilities and only 75.3% for manufacturing.
Recent Comments