By Dave Moenning on May 28, 2019 01:38 am
It's our last day of exploring the Greek Isles, so I'll once again keep this brief. If you haven't visited, I highly recommend a trip to Crete, a simply magnificent island with friendly people, gorgeous land/seascapes and lots to do and see. Oh and the seafood isn't too shabby either!
Looking at the big picture this week, I can't help but be struck by the recent string of economic data, which has come in weaker, in some cases, much weaker than expected.
For example, April's durable goods report was just plain bad. This follows Thursday's PPI data that also surprised to the downside. JPMorgan economists wrote that when they combine this data with last week’s crummy retail sales report, they conclude that second quarter activity is, "sharply downshifting from the first quarter pace." The JPM team wrote that they now see much slower second-quarter growth of just 1%, which is down from their prior forecast of 2.25% and a far cry from the 3.2% GDP print from the first quarter.
Next up, it is worth noting that the Atlanta Fed's GDP Now tracker has also fallen hard lately. While this real-time analysis of GDP growth tends to be fairly volatile, the WSJ tells us the projection now stands at 1.3%.
Not surprisingly, Treasury yields moved hard on the news. In fact, the yield on the 10-year dropped to new lows for the year and to levels not seen since 2017. Thus, it is easy to argue that both yields and bond traders have renewed concerns about the state of the economy.
If you then factor in the ideas that (a) the Fed says they aren't really looking at a rate cut anytime soon (nor should they be in my humble opinion) and (b) the ongoing trade concerns, one can't be blamed for feeling a bit down about the outlook for both the economy and the stock market.
However, my final thought on this fine morning on the Agean sea is that this is exactly the type of sentiment that tends to be seen during corrective phases. While I still believe that the current sloppy period will likely wind up in "pause that refreshes" category, it certainly feels like the path of least resistance is down. And with the S&P's 200-day just below, I would not at all be surprised to see this level tested a time or two before the bulls regain their footing.
Disclosures
At the time of publication, Mr. Moenning held long positions in the following securities mentioned: None - Note that positions may change at any time.
Weekly Market Model Review
Now let's turn to the weekly review of my favorite indicators and market models...
The State of My Favorite Big-Picture Market Models
The Primary Cycle board continues to slip at the margin but has yet to signal any real concern. However, both my "desert island" and global risk models are heading in the wrong direction and getting close to flashing a sell. But as of this morning, the bulls continue to hold the edge.
This week's mean percentage score of my 6 favorite models fell for a 4th straight week to 60% from 72.2% last week (Prior readings: 81.1%, 83.9%, 84.7%, 74.6%, 58.0%, 49.5%) while the median slipped to62.5% from 80% last week (Prior readings: 82.5%, 86.7%, 86.7%, 81.8%, 65.9%, 50%, 50%).
The State of the Trend
The pullback/corrective phase that was expected given the overbought/extended nature of the market coming into May is ongoing. Although this clearly remains a news-driven environment centered on the trade spat with China, the technical damage has been relatively limited so far. However, I would not be at all surprised to see the SPX test its 200-day at least once before this corrective period ends. The good news is that the cycle composite now points higher for several weeks.
The State of Internal Momentum
To be sure, the Momentum Board continues to be a bit sloppy and the path of least resistance given the news environment "feels" like it's down. However, the action if consistent with a pullback/corrective phase and does not suggest (at least at this point) that a major decline is imminent.
The State of the "Trade"
The Early Warning board continues to improve. Yet, I wouldn't call the current setup "table pounding" as this time. As such, some patience is probably appropriate here.
The State of the Fundamental Backdrop
Once again, there were no obvious changes to the Fundamentals board this week. However, as I mentioned last week, our economic composite models continue to improve - albeit slightly. So the bottom line remains th same: I believe the backdrop continues to support the continuation of the bull market once the current corrective phase/news environment plays out.
Thought For The Day:
There is a difference between knowing the path and walking the path. -Morpheus
Wishing you green screens and all the best for a great day,
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