So far most of the economic data this week was positive. Third quarter GDP at 3.6% vs prior 2.8%, and weekly Jobless Claims 298K vs prior 321K, in combination boosted sentiment that the economy was growing faster than expected. Now traders fear that "good-news-is-bad," meaning this would give the Fed more of an excuse to taper QE. However, close inspection of the GDP data reflected that most of the growth came from expanding inventories amid a time of weaker consumer spending. Further, employment data should be viewed within the context of seasonal factors such as holiday spending.
The well-respected report from Consumer Metrics Institute sums up conditions in the excerpt below:
Nearly half of the headline number came from growing inventories. Conventional wisdom has this component reversing itself in future quarters -- reverting to a long term net zero gain or loss. In fact, since 2006 the average annualized real contribution from inventories has been essentially zero (-0.02%). Bloated inventories have a tendency to normalize, and in coming quarters we can expect production cuts to accomplish just that. If during the next quarter the inventory number reversed while everything else stayed the same, the headline number would be less than 0.25%.
Employment numbers still provide no "cover" for Fed tapering or tightening.
Contributions to the headline number from consumer spending on goods, consumer spending on services and exports all weakened.
Nevertheless, bullish trends are weakening based more on headlines than an in-depth inspection of the data. Remember algos don’t have time to look under the hood for the details. They only trade the headlines wanting to be first to whatever the news is. The lack of thoughtful investing vs being first to breaking news could be an article on its own.
The previous theme of “bad-news-is-good & good-news-is-better” might change to “good-news-is-bad” since it might disrupt bullish trends based solely of liquidity from QE. And this would only confirm the bizarre of the current market environment.
Stocks were erratic, weak and volatile Thursday with trends shifting more quickly daily and even intraday. Leading the charge lower were many of yesterday’s winners including Financials (XLF), Retail (RTH),Gold (GLD), Gold Miners (GDX), Solar (TAN), China (FXI), Emerging Markets (EEM), Japan (EWJ), Singapore (EWS), Spain (EWP), Bonds (TLT) and so forth. Some winners include an eclectic bunch like REITs (IYR), Semiconductors (SMH), Oil (USO), Euro (FXE) and Natural Gas (UNG).
Volume on the day was about average for the recent period. Breadth per the WSJ was negative overall pushing markets toward short-term oversold conditions.
Friday is the all-important Employment Report from which traders will get a clue how the Fed might react to the number.
The “good news is bad” theme is hard for most investors to understand and accept. Sometimes accepting the way things are is the only way to fly.
Let’s see what happens.
Disclaimer: The charts and comments are only the author's view of market activity and aren't recommendations to buy or sell only any security. Market sectors and related ETF's are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period. Chart annotation's aren't predictive of any future market action rather they only demonstrate the author's opinion as to a range of possibilities going forward. More detailed information, including actionable alerts, are available to subscribers at www.etfdigest.com
|WTI Crude Futr||97.36||-0.02||-0.02 %||01:37|
|US Dollar||80.28||-0.34||-0.42 %||16:43|
|Brazil||2213.32||1.50 %||-5.05 %||-18.86 %|
|Russia||748.03||-0.47 %||-3.42 %||-7.37 %|
|India||401.32||1.51 %||1.75 %||-6.68 %|
|China||65.06||0.19 %||-0.44 %||3.52 %|