I try not to trade on my gut instincts. It's an inherently dangerous method that lacks the intellectual rigor that so often keeps me from doing something foolish. And while that's easy to say, it's a lot harder to maintain this sort of discipline on a constant basis. Thankfully, though, there are days like today that help remind me just how dangerous trading on a hunch can be. As I mentioned in my closing remarks last night, I suspected that this morning's jobless claims report could have actually been better than what the market was expecting. Obviously, that hunch was completely wrong. According to the Labor Department, initial jobless claims rose by 12,000 during the previous week to a seasonally adjusted estimate of 500,000. The less volatile 4 week moving average also moved up to 482,500 from last week's reading of 474,500. To be sure, this wasn't the sort of development the market and specifically the bulls were looking for. Adding insult to injury, the Federal Reserve Bank of Philadelphia's gauge of manufacturing activity in its region came in at a reading of -7.7, which was far below the 8.0 print that the market had been expecting. Of particular concern in this report was the index's estimate of hours worked by manufacturing employees. This part of the index fell to -17.1 from 1.7 in August. Definitely not a good indication of robust job creation and eerily similar to the message provided by the Department of Labor.
The lone piece of bullish economic data came from the Conference Board's index of leading economic indicators. In July, this index rose 0.1%, which was in line with expectations, and suggested that economic growth is still likely to occur in the coming months, but at a rather anemic rate. While certainly not the kind of reading that would shift momentum back to the bull side, this report was largely overlooked by investors today as the concerns about slowing GDP growth and potential deflation were stoked by the two other reports.
As you might expect from the largely negative economic numbers, the equity market sold off pretty hard at the outset of trading and largely stagnated for the rest of the day. The S&P 500 dropped 18.53 (1.6%) and finished the day at 1,075.63. Interestingly, today's drop really only takes us back to the levels that were seen at the end of last week. This suggests to me that the market is still on the fence on which way to go and that the range-bound trading environment is likely to continue for at least a little while longer. This range appears to lie between 1,065 and 1,130. As we've seen so many times, today's trading was bereft of any meaningful volume (3.9 billion shares on the S&P 500), which further reinforces the lack of conviction that I've harped on nearly every day for the last month. More than anything, though, this directionless trade and spartan volume levels make this equity market quite perilous as institutional and program traders continue to dominate the price action. Granted, they can't play these games forever, but until some sort of data comes along to break the market from its funk, we're all playing by their rules.
Treasury bonds, unsurprisingly, were once again the asset of choice today as investors continued to place bets that reflected an increased likelihood of deflation taking hold. The long end of the curve, in particular saw the bulk of the buying as 30 year bond yields fell over 8 basis points to 3.65%. Similarly, gold finished higher yet again to close at $1,232/oz. Believe it or not, today marks the 15th time in the past 17 trading sessions that gold has finished higher! That's a truly incredible run. As I mentioned last night, gold's ability to break through many of the near term resistance points has turned me from a bear to a cautious bull. However, there's one major caveat to my bullish posture: gold has to take a break from the seemingly relentless move higher. In a manner reminiscent of the trading action that led up to the April highs in the S&P 500, gold has moved higher on a daily basis (no pullbacks) while seeing consistently small gains. This type of price action simply can't be sustained and is part of the reason why I will not invest in gold despite its ability to push through resistance. If gold is can at least move sideways for a week or two, or stage a small, controlled pullback, I'll be much more inclined to pick up some additional exposure. But much like the Treasury market, gold is feeling stretched right now and, to me, seems dangerous.
Last, but not least, I would be remiss if I didn't say something about crude oil. Sadly, all that can really be said is that it keeps moving lower. Today's trading appears to have nullified the near term up trend and opened the door to an attack on the critical $72/barrel level. Interestingly (and this was pointed out on CNBC's Fast Money a couple of nights ago), oil prices have been moving in near lock step with Treasury yields. To and extent, this makes sense. As investors grow more concerned about deflation, they shun commodities and pick up sovereign debt securities. To me, the fact that we are nearing a critical support level in crude at the same time that the Treasury and gold markets are seeing significant buying (gold is also bumping up against its all time high) suggests that we may be nearing a tipping point, with crude oil as the potential leading indicator. If support holds, equities would likely be able to mount a rally. If it fails, the prospects for deflation will likely become more than just a passing concern. Definitely something worth keeping a close watch on.
Much like Wednesday, tomorrow will once again be bereft of any major economic data, so look for thin volumes and a largely sentiment driven trade in equities. August is quickly drawing to a close and it's getting harder and harder for my 'one more rally this year' thesis to work out. The door's not closed yet, but it's not far from it. And with earnings reports beginning to wind down, this market will continue to be driven by macroeconomic factors and the whims of investors. A tough environment to invest in for sure. Until tomorrow.....
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