As I mentioned on Monday, the equity market has been primed for a bounce as the drift lower over the past few sessions was likely to bring out some bottom fishing. Just under an hour into the trading day, the S&P 500 is up about 1.65% with the other major averages moving up in similar fashion. Adding to today’s euphoria, aside from the short-term need to rally, was ADP’s estimated addition of 93,000 jobs to the private sector during the month of November as well as a rise in China’s Purchasing Managers Index from 54.7 to 55.2. However, this positive news was somewhat offset by November's Institute of Supply Management’s Index reading of 56.6 for the U.S., which was slightly below October’s reading of 56.9. Any reading about 50, though, implies growth, so the absolute level of the index is still bullish. Taken together these numbers continue the theme of stabile to modest growth taking hold across the globe despite various regional issues. That said, the employment data needs to be kept in context as 93,000 monthly job additions are far from what is needed for the U.S. economy to recoup the losses that were seen in 2008 and 2009, let alone expand employment beyond 2007 levels.
As I’ve been saying for a while now, the bullishness surrounding these readings are likely to be tempered by the overhang of Europe’s financial situation, China continued policy efforts to slow their economy (only modest success so far), and currency devaluation worries. In fact, looking at the S&P 500, today’s rally is simply a continuation of the sideways trade that has been in place since early November. Have a look at the chart below and you can see exactly what I’m talking about.
And while today’s data may mark a turning point for the market longer term, it’s clear to me that indecision remains the overarching theme of this market despite large day to day swings in both directions. A close at or below 1,200 will go a long ways towards solidifying the sideways trend for the foreseeable future.
Outside of the jubilant equity market, it appears as though most other ‘risk-on’ asset classes are getting in on the buoyant mood. Commodities, in particular, are moving up in a fairly sharp manner with crude and associated distillates up anywhere from 1.5% to 3.0% so far today. And as you might expect, safe haven assets like the U.S. Dollar and Treasury securities are seeing a fair bit of selling. In the case of Treasuries, they’re giving back the majority of their recent gains as 10 and 30 year yields are up 11 and 7 basis points respectively. Inflation concerns are likely a large component of today’s move, though I remain skeptical of such arguments for now. One of the reasons for my skepticism has to do with gold bullion prices and their inability to rally so far today. As the classic inflation-hedge security, I would have expected gold to have continued yesterday’s rally as better U.S. economic data raises the prospects for a rise in the general price level. But, so far, this is not proving to be the case; hence my skepticism.
For the remainder of the session, the key item to watch will be the 1,200 level in the S&P 500 and the price action through the close of the market. Recent history suggests that this morning’s bullish fervor will wane as the day wears on, thus keeping the sideways trade intact. Also of note will be the trend in the U.S. Dollar Index. While down in early trading, due in part to the sharp move higher of late, the index appears to remain resilient as much of the early losses have already been recouped. If the greenback can hold on to minimal losses in the face of better than expected economic data, this will say a lot about investors’ mentality. That of caution and increasing faith in the U.S.
Until later…..
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