Editor’s Note: While Sam Collins is on vacation, we’ve asked Nick Atkeson and Andrew Houghton, editors of Big Money Options, to provide you with a comprehensive market outlook and a trade of interest until Sam returns June 1, though we will not be publishing The Daily Trader’s alert Monday, May 25, in light of the market holiday. Look for the next issue Tuesday, May 26.
What could have been a very difficult day for the markets Thursday became a bit easier in the final hour as the market rallied off its lows.
The S&P 500 (SPX), after reaching an intraday low of 879.61, closed at 888.33, down 1.68%. From a technical standpoint, this is just below the 21-day moving average of 890.91. Breaking and closing below the 21-day moving average may add to the list of reasons the market may be under pressure near term. The Dow (DJI) was down 129.91 points, or 1.54%. The Nasdaq (NASD) closed down 1.89%.
The CBOE Volatility Index (VIX) closed at 31.35. This measure of volatility has shown incredible volatility in the past two days climbing from an intraday low of 26.57 yesterday to close today at 31.35, an 18% increase.
Although the news yesterday was a mix of positives and negatives, the market clearly focused on the negatives. We started the day with a report showing the biggest monthly gain since November 2005 in the leading economic indicators (which were up 1%).
On the job front, initial claims fell to a seasonally adjusted rate of 631,000 in the week ending May 16 compared to a high of 674,000 posted in late March. The market chose to focus on continuing jobless claims as the hit a 16th consecutive record high.
The Philadelphia Fed’s survey was worse than expected showing only a tepid global recovery. However, the Philly Fed Index rose to negative 22.6 in May from April’s negative 24.4, which is an indication that the economy is not getting worse. The market expectation was for negative 18.
Standard & Poor’s revised the outlook on United Kingdom debt from “stable” to “negative.” There is rising concern that other county’s sovereign debt may be downgraded. On CNBC today, Bill Gross of Pimco highlighted growing concerns of a debt downgrade of U.S. Treasuries as weighing on the markets. These concerns were mated with the government’s announcement that it plans to issue a huge amount of new U.S. government debt next week.
The credit markets were flat to slightly better yesterday. It appears there is an increased state of de-coupling that is occurring between the equity and credit markets.
Internationally, we are seeing improvements in auto sale statistics in the Eurozone, Brazil, Germany, India and China, as well as increases in nominal retail sales in the U.K. and Australia.
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What the Markets Are Saying
Investors are trying to match the pace of the real-economy recovery with the appropriate rate of market appreciation, but the market is saying, “Not good enough.” Right now, the market seems to be telling us that a 30% move up from the lows is ahead of the real economy; the market needs to cool off and allow the real economy to catch up.
While the market is calibrating itself to the constantly revised outlook of economic recovery, it is having to absorb a surge of stock issuance. In addition to Bank of America (BAC) selling 1.25 billion shares, OpenTable (OPEN) and SolarWinds (SWI) went public. Twenty six other companies had secondary offerings this week.
Markets rarely, if ever, go up or down in a straight line. If we are coming out of the worst of the recession, it is likely to be a bumpy ride. With the credit markets continuing to improve, our outlook remains constructive on the markets for the intermediate term.
Today’s Trading Landscape
The earnings calendar today is light. Before market open, we will hear earnings reports from Campbell Soup, Medcath, Met-Pro and Yingli Green Energy.
On the economic front, the U.K. will report its first-quarter provisional GDP.
On the Friday before a long weekend, it is not uncommon to see some short covering, which typically provides the market with some buying pressure.
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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.
