Stock Market Analysis
CONCLUSIONS . Last week stocks moved ahead at a good pace, perhaps encouraged by reports of increased employment. A total of 925 stocks set new highs against fewer than 50 new lows. The day of the heaviest trading volume was Thursday, which happened to be the only losing day of the week. Although unemployment claims may be somewhat reduced from time to time, Americans continue to have about 5 million fewer jobs today than we held at the top of the market in 2007. And it is disturbing that last week’s report of more workers being hired also coincides with reduced aggregate numbers of hours worked. Are we hiring more people but working them fewer hours??
Investors were thrilled by rising prices, as the dollar and treasury bonds rose. For a change, commodity prices were firm, and more optimism was seen in a variety of sentiment gages: The VIX fear indicator touched 12.5 during the week, an exceptionally low level of concern; Put/Call price premiums dipped to the region below .70, also very low. The AAII survey of small investors saw, for the first time in weeks, more bulls than bears. Trader optimism rose to a moderate level.
The Investors Intelligence bulls/bear ratio came in at 52% to 19.8%, a hefty 32 point margin for the optimists. This week analysts rated more than eleven SP500 stocks as “BUYS” against each one ranked as a “SELL” which is historically more than 35% above average enthusiasm. This week Barron’s sported headlines: “This Bull Has Room to Run” and quotes, on the cover page, a prominent bull who says “the Dow could hit 17,000 by year end.” We have previously reported that Barron’s “Big Money” poll was positive by almost 74 points; only the Merrill Lynch Sell Side indicator has continued on a muted, pessimistic track at readings just below 50, which is said to indicate “Extreme Bearishness, Bullish for Stocks.”
It is generally clear that optimism is the mood of the day. This brings to mind a comment I made to the media a short time ago: Most people shop for bargains and sales. The stock market is one of the only arenas where rising prices make objects appear to be more desirable.
Although stocks have moved ahead, and enthusiasm is rising, share prices are losing momentum. The rate of change is diminishing. Economic problems? The retail sales slowdown may be hitting automobiles, at least according to some very preliminary indications. Demand for bank loans among small business firms has lessened, perhaps an indication they see lower demand for the products they sell. And our favorite leading economic indicator, the coincident/lagging index, is falling. The Bloomberg economic surprise index has just gone negative.
Our leading stock indicators are in the aggregate mostly unchanged. Over the past two months they have trended to drift unfavorably. We find our Risk Exposure Ratio to be 76, an extended reading. The indicators present an opposite picture to the one seen last fall, when stocks were basing prior to the big rally, and we were heavy buyers. Although we don’t yet find evidence that stock prices are at a peak and must decline immediately, risk levels are elevated. A cautionary path is advisable. Market tops are often notoriously long lived and this one will likely be no exception. Investors might use this time to upgrade portfolios, weeding out stocks which have not kept up with the market and replacing them with more promising issues.
F James, Ph.D.
Bond Market Analysis
Conclusions: No market ever goes straight up or down. This week’s installment of “As the Bond Market Turns” once again proves this theorem correct. Treasuries had been enjoying a sizable rally since early March. Many pundits were beginning to acknowledge that maybe the economy really was not in excellent shape.
Then with the previous week’s above-expectation employment report the Wall Street crowd is once again singing the economy’s hosannas. This has led to dramatic rise in yields in a rather short period of time. But what, exactly, is this rise based upon?
After all, this week did not exactly feature a plethora of economic releases to give evidence of the state of the economy. Generally, the meager releases we did see suggested a sluggish, not prosperous economy ahead. Consumer credit, often a catalyst for the economy, was tepid at best especially when looking at revolving debt such as credit card usage.
Some speculate that the economy has turned the corner enough for the Federal Reserve to turn down the flow of stimulus. The data may suggest otherwise. In the last four weeks 70% of the monthly economic releases have been disappoints compared to Wall Street’s expectations.
What actions could be taken to actually improve the economy? Our research suggests lowering and flattening the tax code would make an excellent start. The Tax Foundation researched each state’s tax code. When we combined their findings with a 10-year analysis we found the states offering the lowest taxes enjoyed the best gains in new jobs, economic growth, and revenue growth to the government. Similar findings came when compared the number of tax brackets and the government’s success penalty (where we compared relative tax burden between of someone earning $2.5 million and $25,000). Gently put, money likes to go where it is welcomed and not punished.
Presently our indicators remain favorable for bonds. Twitter quotes, including well known bond manager Bill Gross, which proclaim the bull market for bonds has “likely ended” warm the contrarian’s heart. We expect the pullback in yields to provide upcoming buying opportunities.
David W. James, CFA
