QUICK SUMMARY OF THE DAY:
As suspected, equities continued the relief rally that began in earnest late last week. A better than expected (but still dismal in the scheme of things) jobless claims number this morning made sure that nothing on the macroeconomic front would derail the bull's march today. Strangely, though, the market held near unchanged for the better part of the day until, as usual, the ETFs and HFT (high frequency trading) orders started to come in around 2:00 pm CDT and drove the Dow up nearly 100 points in 30 minutes. With volume absent, save for these types of traders, the market is truly in the hands of program traders and ETF administrators for the foreseeable future. Knowing where and how they want to be positioned, I suspect, will go a long way to correctly gauging equities' ultimate direction. For now, I'm looking for this rally to continue up to the 1,095 - 1,105 level before meaningful selling is likely to come in. As I'm still a bit short, I will be looking to the level as the determining factor on whether to add to the position or square it and reevaluate.
One of the reasons why I think the stock market is ripe for an additional move higher is the action of late in the Treasury Market. Long-dated Treasuries have seen their yields move up 10 to 15 basis points over the last two days, which is quite a reversal given the scale of their decline in June. This, to me, indicates that money managers are beginning to shift funds away from the security of T-Bonds and into more risky asset classes. The Euro, high-beta tech stocks, and even commodities (except for gold) have all seen demand pick up as this 'risk trade' is again becoming a popular strategy. And now that the third quarter is officially here, there's a great deal of incentive for institutional managers to begin redeploying the capital they hoarded at the end of Q2 into these types of assets. Couple this with the light volumes we're seeing and higher equity prices are all the more likely in the near term.
FUNDAMENTAL VIEW:
As promised, today I will begin to delve into the specifics of my fundamental outlook. For the next week or so, I'll be focusing on why I believe U.S. investors will likely find a great deal of disappointment in equities over the next couple of years. There are numerous reasons for this outlook. Let me start with the one that's most obvious:
Job growth. Despite stimulus, monetary intervention, and a slew of other federal programs designed to backstop the financial sector, job growth has been non-existent and is likely to remain so for some time. Simply put, consumers have less income available to spend. Baby Boomers, who would otherwise be thinking of retiring over the next decade or so, are being forced to postpone this milestone and extending their time in the workforce. As a consequence, new entrants into the workforce are finding fewer and fewer positions available and wages that are no where near their expectations. As a result, both young and old are choosing to pay down debt or hoarding cash in an effort to weather an economic environment that they see as deteriorating. Whether or not this is truly the case, the mere fact that this is a widely held perception means that a consumer-based spending spree will not be the engine that brings the domestic (or global for that matter) economy back to life. Throw in the impending expiration of the Bush tax cuts in 2011 and consumer discretionary income and the jobs it creates will be further compressed. These are a couple of nasty headwinds to be overcome and I'm not quite sure they can be overcome in a painless fashion.
TOMORROW:
As I mentioned before, look for equities to continue their march higher. It wouldn't be surprising to see the markets down early in the day, but close higher as this has been a regular occurrence of late. Keep and eye on volume. Any meaningful pickup will shed a great deal of light on where investors think this market is really heading. Also, the Euro should be worth a look tomorrow. It's up almost 5 cents against the dollar in just the past couple of weeks, which means that it might be a good time to think about a short position. For now, though, I'll sit back and watch until I see a more meaningful sign of a turnaround in the currency's momentum. Lastly, I'll be watching gold. It's been a real head scratcher for me over the last few months, but, thankfully, that's kept me away from the recent decline. I want to see a meaningful move (in either direction) to help give me a sense of where it's going. Until tomorrow.....
- JMO
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