This market rally has more staying power than the Energizer Bunny.
The Teflon Market continues to power higher thanks to the Rodney Dangerfield rally. The rally that has had so much trouble getting any respect has turned into the schoolyard bully. Shorts are getting beaten to a pulp on a daily basis and bystanders on the sidelines are being pulled into the fray.
It would appear we have definitely reached the "Oh heck I missed it, throw money at the market" stage. Fund managers have to remain fully invested with every new dollar they get because they can't let any other fund outperform them. Investor money follows gains and it is a cutthroat and highly competitive fund market.
Treasuries are selling off with the yield up +19.7% since May 1st. That is the difference between a yield of 1.61% on May 1st and Friday's close at 1.95%. We are closing in on that 2.0% level again and that is considered the turning point to shift money from treasuries to equities.
Ten Year Yield Chart
However, despite the monster +9% gain in the Russell over the last four weeks there are a lot of investors still unconvinced. Credit Suisse reported that 30% of investor accounts were all cash. That is a huge amount of money showing investors are still skeptical of the rally. Morgan Stanley said only 34% of client funds were invested in equities. Only 34% !! That means 66% is either in cash, bonds or treasuries.
Some of that money will never be put into equities. The holders may be retirement age and scared of another 50% correction, flash crash or some other unknown. Cash is their form of security. Another large chunk of that cash is probably waiting for a correction as an entry point.
The bottom line is still a lot of cash on the sidelines and we are already reaching the euphoria stage in the rally where that cash is sucked into the market because Ma and Pa investor suddenly succumb to the constant new highs and chase stocks.
Normally this would end badly and it still may. However, there is a new sentiment appearing in the market. Apparently as a result of the Fed, BOJ, BOE, ECB, etc and the rampant stimulus programs there is a shortage of stock. Trillions of dollars are flowing into the U.S. markets from institutions and from overseas investors fleeing their local banking systems. Investors who are already long equities are celebrating and they don't want to sell. That leaves a huge influx of cash bidding for a shrinking number of shares.
This is like the current Tesla (TSLA) situation. More than 75% of TSLA shares are owned by ten entities and the shares are not traded. Of the 25% of the shares that do trade 41% are sold short. Every piece of good news creates a new short squeeze because new investors are trying to buy a piece of Tesla. There are too many people trying to buy too few available shares.
The current market rally is too much cash chasing too few shares. The internals tell the tale. Volume all week has averaged 6.2 billion shares per day. We are setting new record highs and the volume is on the low side of mediocre. There is no rush to buy stock at least in terms of volume. The available shares are simply being bid higher by the surge in cash. On Wednesday there were 1,250 new 52-week highs and that is a 25 year high but volume was still mediocre.
I feel like we entered the Twilight Zone the last couple weeks. The major economic numbers have accelerated to the downside while the market races higher. The U.S. economy is plunging but the dollar is soaring. The dollar hit nearly a three year high on Friday despite the terrible economics. The justification was "expectations the Fed would taper the QE before year end." What economic planet are these market reporters on? If the economy continues on the current path they will be raising their purchases in the coming months.
The critical Philly Fed Manufacturing Survey on Thursday fell 6.5 points to -5.2 and back into contraction territory. New orders and backorders plunged well into contraction. The Empire Manufacturing Survey on Wednesday crashed back into negative territory from +3.1 to -1.4 compared to estimates for +4.0 gain. New home construction starts fell -16.5% from 1.036 million to 853,000 in April. What happened to the housing boom? Lumber prices are imploding and last time I checked houses were built mostly with lumber. Lumber prices have fallen -23% since March. Wal-Mart missed on earnings, sales declined and they guided lower. That does not suggest the economy is getting better.
The U.S. is supposedly the prettiest girl at the dance with GDP expectations for the full year at +1.8%. Japan is forecast at +1.1%, the Eurozone -0.5%, Russia +1.6% and all OECD (developed countries) average +1.2%. That is another reason given for the stronger dollar because we are growing faster that everyone besides China (+7.6%) and India (+6.0%). Personally I believe the difference between the U.S. GDP expectations at +1.8% and the other developed countries at +1.2% is nothing to brag about. With our current economic history that 1.8% is definitely at risk.
Dollar Index Chart
Lumber Futures Chart
To further convince us we have entered the Twilight Zone the Consumer Sentiment for May surged from 76.4 to 83.7 in Friday's release. That is the highest level since July 2007. Yes, I am not kidding. We suddenly rebounded from worrying over the Fiscal Cliff, the Sequestration, Debt Ceiling and a dozen other things to the highest sentiment in six years? I am not making this stuff up.
The present conditions component soared from 89.9 to 97.5 and the highest level since October 2007. The expectations component rose from 67.8 to 74.8 and the highest level since November. Apparently consumers are super excited about the arrival of spring but they are less enthused about the outlook for the holiday season six months from now. It is amazing what record highs in the stock market can do for consumer sentiment. There was also a week of headlines about the Nonfarm Payrolls and uninformed consumers thought the addition of 278,000 part time jobs with no health care benefits was good news. The rise in home prices was also a factor. If that drop in lumber prices translates into a stalling housing market the sentiment numbers can decline just as fast as they went up.
It is too soon for the IRS scandal, the seizing of two months of AP phone records and the new revelations on Benghazi to have impacted sentiment but you can bet it will. The IRS is the most hated government organization and this will trickle down to the consumer level. The tin foil hat community now has justification for their conspiracy theories. With the IRS the controlling body for implementation of Obamacare what else could go wrong?
The actual sequestration pain is expected to intensify over the next 90 days so I would expect a decline in sentiment over the summer months. As you can tell from the chart below the sentiment numbers are very volatile as we move from headline to headline throughout the year.
Consumer Sentiment Chart
The economic calendar for next week has two Fed activity reports and two housing reports. All will be of interest to the market but it is unlikely they will cause a market disruption.
The release of the FOMC minutes on Wednesday is the biggest event of the week. After several Fed heads gave conflicting outlooks last week for ending QE in 2013 the minutes will be scoured for signs of Fed direction. Given the rapidly declining U.S. economics I can't imagine they will have spent much time pondering their eventual exit. Over the last month several Fed heads have emphasized the potential for increasing QE purchases if the economy continued to slide. I believe those comments found more traction in the equity market than comments on tapering QE.
On Thursday the president of the San Francisco Fed, John Williams, caused a drop in the market after saying the Fed should begin cutting back on QE purchases this summer. However, on Friday Minneapolis Fed president, Narayana Kocherlakota, warned the Fed has not done enough to boost economic growth. He cited the declining inflation and outlook for overly high unemployment for the next 2-3 years. He said, "The Fed has still not lowered the real interest rate sufficiently in light of the changes in asset demand and asset supply." He wants the Fed to keep rates low until unemployment is 5.5%. That would be in 2016 or so at the present rate.
The market does not know who to believe with a Fed speaker or two almost every day. This is why they will pay so much attention to the minutes this week. That is the official log of what they really discussed at the meeting.
It was a bad week for gold. The yellow metal declined -6.14% or -$89 to close at $1358 on Friday. The soaring dollar and the end of the Armageddon trade are weighing on gold prices. Europe appears to be recovering and the weekly crisis has disappeared. Greek 10-year bonds are now yielding 8% compared to the 30% just a year ago. Spain posted its first trade surplus on record for March at 634.9 million euros compared to a deficit of 3.2 billion in March 2012. Turkey's two-year bond yields fell to a record 4.61% after Moody's raised the country to investment grade for the first time in more than two decades. China remains the fly in our soup with expectations for the lowest growth since 2009 but at least they are not in crisis mode.
Paper gold declined for seven consecutive days and the worst streak since March 2009. When it hits the April low of $1321 I would expect a flurry of dip buying. Whether it will be just a trade or a longer term move is unclear. Physical gold demand is surging but with the equity market in euphoria mode stocks have more appeal than gold. The difference between paper gold (ETFs, futures) and real gold (coins, bars, jewelry) will eventually shrink. When thousands of hedge funds and speculators in general can create a futures contract by simply selling (shorting) it into existence the volume of paper gold is many times higher than the real gold it could eventually represent. Unlike equities there are no shares to borrow you only need to "sell to open" to create a new futures contract. These paper, actually electronic, contracts are simply trading mechanisms and are not really gold. They are the illusion of gold and those contracts are being cancelled by investors who want to use that margin to buy equities.
A shortage of the physical metal has caused premiums for delivery of actual gold products to soar and waiting periods for delivery can be up to 90 days. The U.S. Mint sold 210,000 ounces of gold coins in April thanks to the price drop. This compares to only 62,000 ounces in March. They had to halt sales more than once because they could not keep up with the demand. The Perth Mint in Australia is working around the clock to keep up with orders at a level not seen since the 2008 financial crisis.
Speculators have sent the level of short positions at the Comex to the highest level since late 2008 according to SocGen. Shorts have risen from 4.3 million ounces in late September to 13.9 million ounces today. This could be the mother of all short squeezes when it reverses.
Gold Miners ETF Chart
Comex Gold Shorts Chart - Bloomberg
In stock news Dell reported earnings of 21 cents, down from 43 cents a year earlier. It was also well below estimates of 35 cents. Revenue declined -2.4% to $14.1 billion. The earnings miss should help Michael Dell fight off the attack by Carl Icahn in the battle over who gets Dell's bones. For shareholders trying to decide between the $13.65 offer from Michael Dell or the $12 plus stock offer by Icahn the earnings miss makes the outlook for profitability of a post Icahn acquisition look weaker. If Dell's profits are seen to be plunging then investors are less likely to want to accept stock in the new company if Icahn was successful.
Dell is suffering from the decline in the PC business and rise of the tablet model. Windows 8 has been a disaster for the PC companies. The software release has a new user interface and customers don't like it. Humans, especially older ones, don't like change. For the 50+ age group that matured over the last 30 years with a Windows environment that did not change much from release to release the new interface is a change they don't like. For the younger generation that lives on Facebook and social media it has advantages. Unfortunately they don't buy that many PCs and Windows 8 was a negative for PC buyers.
Dell shares failed to move much on the earnings news since the $13.65 offer is outstanding and more likely after the report.
Facebook shares closed at $26.25 on the anniversary of their IPO in 2012. The stock was priced at $38 and traded between $38 and $45 on the first day on record volume of 458 million shares. It would have been more but the colossal mistakes at the Nasdaq kept share from trading for half of the day. Facebook has never returned to that $38 IPO price with the high in 2013 of $32.51. Mark Zuckerberg still has about 28% of the company worth about $13 billion. There are roughly 1.75 billion shares outstanding and the company has 1.1 billion users.
Transocean Offshore (RIG) won a battle against Carl Icahn last week but they did not escape without any scars. Shareholders voted against the $4 dividend plan proposed by Icahn and in favor of a $2.24 per share plan that left some cash in the company. The plan received 75% of the vote. They also voted out the Chairman, Michael Talbert. The company had already said Talbert would step down later this year so the vote was anticlimactic. Talbert had been a director for 19 years. Icahn candidate, Samuel Merksamer, won a seat on the board but his two other candidates lost. Icahn owned 5.6% when he last reported. Shares of RIG declined 70 cents on the news.
Aruba Networks (ARUN) declined the most in five years after it guided for earnings below analyst expectations. Increased competition from Cisco was also a factor. Aruba called it a "heightened level of competition." Cisco is its biggest rival. Aruba guided for profits in the range of 10-12 cents for Q2 and analysts were expecting 16 cents. May has not been kind to Aruba with two major declines in the stock price.
Aruba Networks Chart
JP Morgan (JPM) raised its year end estimate for the S&P from 1,580 to 1,715. They cited the rise in the Transports and Semiconductors as evidence the rally has legs. They also said the widening bond spread suggested money was rotating into equities. Jeffery Saut from Raymond James reiterated his 1,700 or higher target for the S&P.
The brokers raising estimates almost have to do it out of self defense. Having a 1,500 S&P target when the index closed at 1,667 on Friday makes you look stupid to the average investor. I personally understand that these are YEAR END targets and the odds are very good we will trade down to 1,500 or below before the summer is over. If the economy does not stop its slide it could be a lot lower.
The S&P has gained +1,000 points in 1057 days. It was March 6th, 2009 the S&P hit what everybody called a "generational low" at 666. Do you think the Friday close at 1,667 could be an ominous sign? That would be a perfect spot for a retracement to begin but I am not expecting it.
The S&P has broken above uptrend resistance and is in blue sky territory. That prior resistance should now be initial support at 1,650. The 1,700 level should now be the round number target and we could hit it next week if the rally continues at the present rate. We are over extended by any rational metric with the +17% gain for the year. Overextended bull markets can remain illogical for a long time so don't bet against it. Just plan for a dip at some point in our future.
S&P Chart - Daily
The Dow has lagged the S&P in terms of relative performance despite being up the same +17%. The Dow is just now reaching the upper channel resistance at 15,350. Should the market decide to take a rest I would expect the 15,000 level to be strong support. Only twenty-three of Dow stocks were positive with the +121 point gain.
Dow Chart - Daily
The Nasdaq is up +16% for the year and the month of May has been amazing. The majority of the gains have come in the last four weeks. The Nasdaq has gained +11.4% since April 18th. Many years the tech index does not gain that in the entire year.
Looking at the chart shows the euphoria rocket taking off and it met round number resistance of 3,500 at the close on Friday. The RSI is grossly overextended and suggests the index needs a rest. Initial support is well back at 3,400.
Winners and Sinners
The Russell 2000 moved a little bit closer to what could be strong round number resistance at 1,000. If I had to pick a point for the market to react negatively this would be it. If we couple this with the strong round number resistance on the Nasdaq at 3,500, the high was 3,499 on Friday, I would expect this combination to be deadly. However, nothing seems to phase the market. Bad economics, earnings misses and political scandals just bounce off.
I would be conscious and cautious of these levels next week.
Russell 2000 Chart - Daily
The S&P bullish percent rose to 89.2% from 86.2% the prior week. That means 89.2% of the S&P is showing a bullish signal. Historically anything over 70% is considered overbought and anything under 30% is considered oversold. Clearly the S&P is overbought and at a level that has produced sell offs in the past.
S&P Bullish Percent Chart
We know there is a headline in our future that will cause havoc in the markets. The more overextended we become the more likely that headline will appear.
However, as long as there is a surplus of cash and shortage of stock the dips will be bought and the market will continue moving higher. If we were to get a 3% decline I would consider us lucky.
I know most U.S. citizens don't really pay attention to what is going on in the rest of the world. This next topic is important. Last week the U.S. deployed the USS Kearsarge amphibious assault ship along with the 26th Marine Expeditionary unit to Eilat Israel for a "visit." According to the Navy, "While in port, the officers, sailors and marines will meet with local officials, participate in community engagement projects and experience the rich history and culture of the region." What the U.S. did not say is that the Kearsarge and the 26th MEU is now positioned conveniently close to Syria just in case they need to "visit" Syria.
The Russians got the hint and immediately provided one of their own. For the first time in decades the Russian Pacific Fleet transited the Suez Canal and entered the Mediterranean headed for the Cypriot port of Limasol, which is also conveniently close to Syria. The implications are clear that Russia will not stand idly by if Israel or others decide to mount new attacks on Syria. Israel has already launched two bombing raids in recent weeks to prevent missiles from being delivered to Hezbollah. Russia is Syria's ally and they are supplying Syria with higher technology antiaircraft batteries, missiles and long range anti-ship missiles.
Neither of these ship movements made the headlines in the U.S. but it is obvious the stakes are rising in the Syrian conflict with the major players repositioning their chess pieces on the global board.
Not to be left out of the global headlines North Korea launched three missiles into the sea off the eastern coast just to prove it still could.
Iran pulled off another delay last week when it met with the IAEA and the P5+1 UN nations in different meetings and both failed to reach any agreement. It was the 11th meeting for the IAEA and the last five have just had a goal of coming up with a structure for a real meeting. For a year Iran has successfully avoided any real conversation by disagreeing on what would be discussed IF a real meeting was held. There is no way Iran is going to be brought to the negotiating table without the real and credible threat of military action. I don't see that happening in the near future. The U.S. drew a red line in Syria and they stepped over it multiple times with no repercussions. North Korea has been doing it for a decade and finally produced nuclear weapons. Why would Iran not believe they could get away with it as well? Today the U.S. is projecting an image of all bark and no bite.
Enter passively and exit aggressively!
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"Things may come to those who wait, but only the things left by those who hustle"