Another week has gone by and nothing has changed. The stock market still looks poised to bounce higher while investors are trying to sift through a flood of mixed news events. I can't really say nothing has changed. Overall the news flow last week was negative. We did get a promise to help Greece at the special EU summit last Thursday but there were no details. All the sound bites and promises merely bought the EU some time before the situation imploded. Markets will be expecting some details later this week.
If you believe the numbers then China's consumer price index, a gauge of inflation, came in below expectations. That eased concerns that China would not tighten their monetary policy. Unfortunately that was the wrong idea. About 24 hours later China shocked the world by raising their bank reserve requirements for the second time in a month.
Chinese authorities patiently waited until after their markets were closed for a weeklong Lunar New Year holiday in which the nation of China moves from the year of the ox to the year of the tiger. If you listen to the experts on China this is just the beginning and the country could raise rates or tighten bank reserves several times this year to slow down lending, slow inflation, and slow down their economy. One analyst went so far as to say China isn't tapping the brakes they are slamming on the brakes to slow down their economy. With +10% GDP growth last year you really can't blame them for wanting to cool down before they are faced with runaway inflation. Unfortunately, if China is trying to slow down it casts a huge doubt on how long China will be the main engine of growth to pull the rest of the world out of recession.
U.S. data this past week wasn't very exciting either. The only good news was the January retail sales report, which came in better than expected. Investors ignored the news. Business inventory data was very disappointing and raises questions about how strong the recovery might be in the U.S. We went through a 13-month stretch of falling business inventories. After a two-month bounce it seemed like we were in the long-awaited inventory replenishment phase. If the bounce is already failing then businesses are even more cautious/worried than we expected.
This past week also brought the Q4 GDP data for Europe. It too was very disappointing. In the third quarter Germany was leading the region higher. In the fourth quarter Germany, Europe's largest economy, stalled with zero growth. France is Europe's second largest economy and were it not for France's +0.6% GDP gains in Q4 the entire region probably would have been negative. Overall the 16-country eurozone turned in +0.1% GDP growth in the fourth quarter. Meanwhile most of the PIGS countries delivered flat or negative GDP growth.
The combination of the European economic recovery stalling and no details on the Greek aid package sent the euro sliding lower again. The euro may be in a serious, long-term decline. That's going to boost the dollar, which will put pressure on commodities.
We are going to get another parade of economic data this week. The results could move the market either direction. Headlines to watch out for are the NY Empire manufacturing survey, weekly chain store sales data, industrial production, FOMC minutes, producer price index (PPI), the Philly Fed survey, and the consumer price index (CPI).
If you consider how much negative data we saw last week stocks performed relatively well. You could certainly make the case that it could have been worse. On the other hand the oversold bounce has been very anemic and you could easily argue that this oversold rebound is shaping up to be a bear-flag pattern, especially on the S&P 500. Even if stocks do bounce there is significant resistance overhead. I'm concerned that any rebound may prove to be a short-term entry point for bearish trades.
In contrast to this sour outlook I did see a number of bullish charts this weekend. You'll notice that we're adding stocks to our watch list and we added a new stock to the portfolio. I am still very worried about a double-dip recession. Thus far 2010 is shaping up as expected with a very strong 2009 Q4 GDP that will probably fade lower throughout Q1 and Q2. Sadly the second half of this year remains as murky as ever.
In summary stocks are still trying to bounce but will remain extremely sensitive to any news out of Europe over Greece's debt problems. While we wait on news out of Europe the market will get tossed around by economic data in the U.S. I'm cautiously optimistic in spite of all storm clouds circling overhead but I would be very careful about putting money to work in the market. Consider slowly scaling into positions if you see an entry point.
Chart of the S&P 500 Index:
Weekly Chart of the S&P 500 Index:
LONGER TERM OUTLOOK
Previous Comments on my Long-Term Outlook:
My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in 2010 (some analysts are predicting it will not show up until 2011). Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Several weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010 and 2011. Some analysts are forecasting upwards of six million foreclosures in the next three years. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.
~ James Brown