Do Something, Please!

Confused.  Really confused.  I don't know any other way to describe this equity market (and myself for that matter).  It seems like there's nothing out there that will break the major indexes from their ranges.  Coming into the day, I was fully convinced that the markets would close up/down by at least 1% in reaction to the Q2 GDP report.  And for a short while after the open, it looked as though I might be proven correct.  But in the manner that has been the hallmark of the equity markets for the past month, the S&P 500 traded within a narrow band for the majority of the day and closed up by a whopping 0.07 on volume of 3.6 billion shares.  It's as if today never even happened.  However, when assessing today's action in terms of the Treasury market, one would have been likely to conclude that equities sold off due to the dramatic drop in yields across the curve.  Benchmark 10-year Treasury yields fell 7.82 basis points to 2.9088% while the 30-year yield saw the week's selling pressure dry up and push yields down 8.73 basis points to 3.9907%.  This is puzzling to say the least and a great example of why the efficient market hypothesis simply doesn't do a very good job of fully explaining why markets behave the way they do.  Were it to be believed, these markets should be sending similar signals.  Clearly, this isn't the case.

Gold, however, did see a descent amount of buying today that pushed prices up 1.07% to $1,180.90.  While a sizable pop in value, this move still left the market down on the week and likely represented a bit of a 'back and fill' trade.  (Backing and filling are terms used by traders to describe market movements that arise after a big move up or down.  Typically, these dramatic price moves bypass many of the buy and sell orders that would have been executed along the way.  As a result, markets will often move in the opposite direction for a few days as a means of assessing whether or not the original move was disconnected from the market's underlying supply/demand profile.  If a market is truly 'backing an filling' the direction of the original move will be confirmed.  In the case of gold, it appears that Tuesday's drop is being affirmed.)  As before, gold is a market that still perplexes me and continues to provide little insight on its ultimate direction.  That said, it appears as though interest in this market is continuing to wane, so short positions are still likely the best way to play this market.

After reviewing the mixture of economic data out today, all I can think is that the clarity that the market appeared to be gaining on the economy's outlook from Q2 earnings is being clouded by macroeconomic reports that continue to contradict what companies are seeing as well as other economic measures..  For example, while today's Q2 estimated real GDP growth rate came in below expectations at 2.4% (annualized), the Bureau of Economic Analysis also revealed that the Q1 growth rate that had originally been reported was a stunning 1% too low!  So while economic growth did, in fact, slow, this concerning development was somewhat offset by the fact that the sequential comparison was coming from a higher than expected base.  To be sure, this means that quarter over quarter growth slowed more than originally thought, which is a negative development.  But at the very least, the scale of the upward revision in the Q1 numbers raises the possibility that the Q2 numbers will also be revised upward in a significant manner.  As a result, can we say with any real confidence that growth slowed as much as the report would suggest?  Probably not.  Confusing?  No doubt about it.  And to add further confusion, today's Chicago Purchasing Managers Index came in at a better than expected reading of 62.3 (note:  any reading over 50 implies growth in business activity).  So, again, we've got conflicting stories.  GDP says that the economy is slowing, but the PMI data suggests growth.  Trying to make sense of all this data is the sort of thing that will have me grayed out before age 40.

As I've said before, I believe that at least a part of this conflict in the data is due to the increasingly global nature of U.S. companies, which, reduces the predictive value of the traditional domestic economic
data points.  To be sure, the U.S. economy (still by far the largest in the world) has an oversized impact on corporate earnings, but no longer is it the only economy that matters.  To an extent, this is part of what the markets are trying to work through here.  It's a tough question to answer.  Even if you accept the premise that corporate earnings are disconnecting from the domestic economy, there is still a need to discern how the performance of the U.S. economy will affect the growth in other countries.  China is a great example.  As one of the leading drivers of corporate revenue growth, many look to the Asian Dragon as the potential savior of the global economy.  However, this logic ignores the fact that China's export-led economy is highly dependent upon economic expansion state-side for its own growth.  Therefore, any meaningful slowdown in our economy will have spillover effects on the Chinese economy.  This effect will be lagged, but it can't be avoided.  Unless, of course, the Chinese are able to transition from their economy away from foreign demand and towards more domestic consumption.  While this transformation is beginning to materialize, it will take a significant amount of time for this paradigm shift to occur.  So where does that leave things?  It's hard to say.  These are the types of questions that are being debated and pondered ad nausem.  And for good reason.  For now, I wager that companies can, and will, be able to benefit from continued Chinese growth.  However, when the lagged effects of below-trend U.S. growth hit their economy (and are compounded by the highly leveraged and speculative real estate market), earnings will be among the first casualties.  Yet another reason for my concerns about the equity market longer term.

Another week is in the books.  It's been a wild week, but we're closing things much where we left them last week.  It's what makes trading tough.  I'm still holding onto my small Transports position and, so far, like the general price action I've seen from the index this week.  Now if we can just get some kind of movement in the markets.  Waiting around is almost as bad as losing (I stress ALMOST).  This weekend finds me all alone as my wife, Stacy, is traveling with friends for the next few days.  As such, I plan to get caught up on a lot of reading and begin putting together some larger thought pieces to post over the next month.  Hopefully, I can shed some light on the larger themes in the market and help maintain the big picture perspectives that I've noted as being so critical to success in this environment.  I hope you all enjoy your weekend.  See you Monday!