Last week, I said that buyers are on vacation. I could list a number of talking points right now to explain why the market has corrected 5% or less from the all-time high (S&P 500, Dow Industrial, and the Russell 2000), but the simple explanation is that there aren’t enough buyers. Nothing has changed from the data I showed last week. We are slowly bleeding lower as buyers step in briefly, timidly, and with no follow through. I believe eventually price will fall far enough that we will have a tradable rally – at which point, leadership in the correction will likely prove leadership in the rally.
Real briefly, let’s look at the market news today. Some of the reasons attributed to the rally today were the economic numbers. The Bureau of Economic Analysis released its second estimate for 2Q13 GDP. It was revised higher from 1.7% to 2.5% annualized growth – an unusually large revision. The large revision was dominated by larger exports and smaller imports. Initial and continuing jobless claims fell last week to 331,000 and 2.989 million respectively, mostly in line with expectations. Overall, very good numbers that helped lead to a nice dollar rally today.
Some other reasons for the lift in stocks today were 1) The U.S. won’t be invading Syria – rather a brief and measured strike 2) Saudi Arabia is set to increase oil production in the third quarter 3) FDIC reports earnings have risen 16 quarters in a row. 4) M&A activity as Vodafone talks with Verizon 5) Financial journalists doubt Fed will begin to taper its purchases with Syria and debt ceiling worries
There are many reasons to attribute why the market was up today; however, the rally faded into the afternoon like yesterday’s rally. Demand isn’t likely to return into the markets until after we get a look at the August employment numbers next week, the September 18th Fed meeting, technical support levels are tested, or the first missile is fired at Syrian targets.
The market abhors uncertainty, and there is plenty in the air right now. Will the jobs data be enough to trigger a Treasury purchase taper? When will the U.S. strike Syria and how much premium is in crude based on Egyptian and Syrian turmoil? Will there be a big debt ceiling debate? Who will be the next Fed Chairman(person)?
These are many of the questions that need to be answered, but none of them seem to be causing a mini deleveraging cycle like we saw in Aug 2011 and May 2010. Downside volume continues to be subdued while rallies are unconfirmed by volume.
The volatility index also suggests that investors aren’t anticipating much volatility in the next couple of months.
Despite the slow bleed lower by the major indices, I’ve mentioned in the past how important it is to realize that it is a market of stocks, not a stock market. Rotation is always happening. The old adage, “there’s always a bull market somewhere” is never old. It’s important to watch what areas of the market hold up well in this correction because chances are they’re likely to be strong when prices lift. As I’ve shown for the past few months, we continue to see a rotation into economically-sensitive areas. You wouldn’t see that if we were at a market top. Essentially, investors believe the economy is improving and they’re willing to bet their hard-earned money on it.
Consumer Discretionary Stocks Outperform Staples
Cyclicals versus Consumer Indices
Risk On Beating Risk Off
The Russell 2000 Small Cap Index Staying Strong
Favorable industries include: biotech, capital markets, internet, energy services, pharmaceuticals, regional banks, chemicals, electronic manufacturing, industrials, insurance, retail (many industry groups here), movies & entertainment, managed healthcare, and more.
Conclusion
We still lack the catalysts and the support levels to solicit investor demand. Despite a confluence of news stories over the past few weeks, nothing is really causing a mass exodus from the market. From some of the desk flow data I look at, most of the selling appears to be in retail accounts in contrast to institutional accounts. All-time highs, corrections, and plenty of news have all served their purpose in scaring investors. “Buy the dip” has worked in the past three years. Is this dip any different? I doubt it. In technical analysis, we’re taught that the two most important indicators are volume and price. We’re beginning to enter oversold conditions on an intermediate basis, but volume continues to be lacking. As Carl Icahn would say/tweet, “more to come”.
