A Whole Lotta Nothin'

Well, despite soft consumer spending numbers and less optimistic commentary from the Federal Reserve, equity markets manage to push prices simply to the unchanged line today.  I guess that means that one good earnings report from Intel (and yes it was a very positive report) equals two downbeat macroeconomic news items, hence the flat trade.  Volume was again on the lighter side at 3.6 billion shares for the S&P 500.  As I had hoped, it seems like the market wants to take a pause here to try and sort out which direction it wants to go.  Given the divergence we've seen in the various economic indicators and what's been reported by companies (yes, it's still very early in earnings season), it's only logical that traders take a step back and reassess.  That this pause coincides with the overhead resistance around the 1,100 level shouldn't be any big surprise either.  The more interesting indicator of the day, though, was the action in the Treasury market.

After seeing rates back up nearly 20 basis points over the past two weeks, Treasuries finally caught a bid today.  And it was a fairly large bid at that.  Yields fell all along the curve, with especially steep moves of over seven basis points or more seen in the 10 and 30 year bonds.  Given the fact that the Treasury market dwarfs the equity markets in sheer size, moves in this market require a significant amount of capital to be moved in one direction or another in order to move prices.  As such, today's drop in yields speaks to the fact that the market is still well bid despite the slight weakness of late.  It's hard to say at this point whether or not money managers are shifting assets into or away from Treasuries, but the fact that equities ran up disproportionately when compared to the sell off in T-Bonds is at least one indication that investors are still not seeing enough opportunity elsewhere to warrant getting out of their fixed income positions en mass.

For my part, I feel like both equities and bonds are at a bit of a crossroads.  Many see the economic and fiscal challenges that face the economy over the coming 18 months as reasons to play it safe and preserve capital.  On the other hand, continued positive corporate earnings momentum along with seemingly robust demand from Asia have the potential to help underpin an economic recovery and push risk-based assets higher.  Both arguments have merit to them.  As you know, I fall into the former rather than the latter.  So where does that leave us?  Simply put:  data dependent.  I fully expect the equity markets to vacillate within the price channel (see chart below) that's been in place for the last several weeks. 

Today's price action is a great example.  Good news comes out, the market rallies.  Bad news comes out, the market tanks.  Until the economic and corporate earnings data begin mirroring one another, no one (myself included) will be able to get an accurate sense of the larger trend we can expect over the next 2 months or so.  Couple this with the light volumes that are the hallmark of summer and you've got a recipe for stagnation.  This doesn't mean that prices won't move, but it does mean that equities are likely to end the summer about where they started unless some external event forces investors back into the market.

So we're all in 'hurry up and wait' mode for the time being.  I'm still holding on to my short position for now as the market hasn't yet been able to flush me out.  There's a lot of earnings left to come both this week and during the next month, so the story is far from told at this point.  While I'm certainly a bit nervous in my short, I think I might be more concerned if I were long in here.  Earnings have been good so far, but that's got to carry on throughout the majority of releases to keep this momentum going.  And not just in high margin areas like technology.  We need to see positive commentary across the board.  Will we get it?  We'll see soon enough.