Right at the end of Friday's session the Dow swept upward to close at a new all-time high. This provided the latest traditional Dow Theory bull confirmation as the Transports reached a new high the day before. Both averages are in record territory again.
The S&P 500 and NYSE Advance-Decline line are following suit. In the left chart below can see the recent rally in the S&P which also reached a record high on Friday. In the right chart we see strong participation in the rally as the A-D line sits right at its highs. The strong participation is especially positive considering the weakness that we've seen in tech and small-caps.
In a strange twist, ISM manufacturing data released yesterday morning was done so erroneously. An initially reported figure of 53.2 missed expectations of 55.8. This drove a reversal of early morning gains. Recall that any number above 50 indicates expansion. However, near 9am PST, ISM corrected its May data, revising five separate indexes higher. The "correct" PMI was 56.0, showing a stronger pickup in manufacturing activity than previously thought. This revision brings the data in line with other related measures, and at the same time gives conspiracy theorists some new material to work with.
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According to ISM, the data was incorrect because the wrong seasonal factors were applied. Folks on Wall Street had already been jabbering about a Spring swoon following the erroneous numbers, and I'm guessing most of that talk subsided quickly. The revision was instantly incorporated into the markets driving most averages higher. Note: a second revision puts the real PMI at 55.4; get it together ISM!
This week should prove interesting as the markets look ahead to the ECB announcement on Thursday. Based on comments made by Mario Draghi in past weeks, it's likely that the ECB will act on Thursday to loosen monetary conditions. At the moment it seems many are betting on the ECB introducing a negative interest rate on deposits. The ECB's final determination will be influenced by reports issued this week. On Tuesday, eurozone inflation data and estimates will be released as will unemployment data. Then on Wednesday, revisions to first quarter eurozone GDP are out. Any movement towards increased liquidity is likely to find a warm reception by global markets. It's not unreasonable to wonder whether recent market gains are being partly driven by anticipation of easing monetary conditions.
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While not at all-time highs, the Europe STOXX is at post-recession highs and has broken out into a new advance over the past two weeks.
Same story with GDOW, the Global Dow Index. While not having surpassed pre-recession highs, GDOW is breaking new ground. It continues to be a global bull market for equities.
The monthly nonfarm payrolls report is also due out this week on Friday. As discussed in recent remarks, the move lower in Treasury yields has a lot of investors worried as they are interpreting this move as indicative of an upcoming recession. I have voiced why I do not believe that to be the case but nevertheless it's causing heightened reactions to every bit of economic news that comes out. We may finally see some volatility in the markets this week.
The above content was an excerpt of Richard Russell's Dow Theory Letters. To receive their daily updates and research, click here to subscribe.
