Morning Market Thoughts
Good morning. I hope you had a relaxing weekend, because it’s turning out that the factories in New York didn’t even have a good month. The Empire State Manufacturing Survey revealed that factory activity in May (they publish this number in the middle of each month, so yes, these are the May numbers…with the last part of April in there too) fell to a – 9.02, blowing up the expectations of a +7.25 reading. The April number was +9.6. So while economists were expecting a slow down, they sure weren’t expecting a full-blown reversal.Put this in perspective. Factories in New York grew in March and April, but suffered a huge contraction in May. Nationwide, factory output has also been low, with US businesses spending less on equipment and machinery, and the global economy weakening. (You’ve probably read at least one or two articles noting China’s slowing growth).
Yet, despite these discouraging numbers, the futures are about flat. In other words, there is no “OMG, sell, sell, sell!” dynamic in this market. Instead, I think traders are balancing the Fed’s desire to hike rates against the lack of a reason to hike rates, and coming out on the side of “no rate hike.” As previously noted, I think the desire to hike rates comes, at least in part, from the angle of reverse psychology being employed by the Fed.
1. We hike rates when the economy is growing because we don’t want the growth to get too far out over its skis. We want to moderate the growth to keep inflation under control.
2. The current economic environment shows virtually no growth — if we hadn’t made some adjustments several months ago in how we calculate the GDP, the growth data would be even more stagnant.
3. “Hey, I know. If we hike rates, we might be able to get folks to believe that the only reason we’re hiking them is that the economy is really strong…and that might spur more spending and business activity. They’ll believe that we see things that they don’t.”
Think of a dog and his tail. The dog is the economy and business/investing activity, and the Fed is the tail. The Fed starts wagging. The dog sees that his tail is wagging. Because he only wags his tail when he’s happy…he decides that he’s happy.
The reaction of the market to this economic bad news reveals that investors don’t think the tail wagging is going to work…but they also don’t believe that the global economy is going to crater. So, the takeaway from investors is that the Fed won’t wag its tail (hike rates) because there is no evidence to support this tactic — and they do need SOMETHING to hang their hat on.
So with a neutral view towards the cost of money, the market remains range bound. So the weak economic numbers have essentially a positive impact on the stock market…at least for now.
I’m suggesting that you keep a close watch on the 2,040 level in the S&P. That’s the level at which buyers have soaked up stock since early April. If the S&P falls below that level, it’ll be a new low and folks will start considering a bearish “head and shoulder” pattern. But if that happens (I expect it to break sometime soon), realize that this is a choppy market. You’re going to see a lot of gyrating around that level.
Here’s how you deal with this. First, embrace the fact that you don’t trade the S&P, you trade stocks and options. Next, only be in stocks that are still trending. For example, Netflix (NFLX) is not trending; Northrop Grumman (NOC) is. Target (TGT) is imploding, but Amazon (AMZN) is trending higher.
Be in the stocks that are either resting, or that continue to go higher. This list is shrinking every week. If you embrace the fact that this list is shrinking and resolve to remain invested ONLY in stocks that are still on the list, then you’ll find yourself naturally raising cash, and you’ll find your investments actually working quite well in a tough business environment.
See you in the forum.
Dan
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