Stocks reading to break!
Last week our report was titled:
Markets Waiting for Bad 1st Quarter GDP
The consensus pegged the 1st quarter (qtr’) economic growth (GDP) estimate at 1.3%, which we hinted was a weak number, but not weak enough. It was clear that the rising dollar, contracting energy sector and CA port strike would cause the GDP to fall well under 1%. Certainly 0.25% is anemic and thus far the 2nd qtr’ is starting off slow as well. Should April be a reflection of the rest of the 2nd qtr’ then 1% growth this qtr’ would be optimistic and the 3.14% average estimate by the 60 economists surveyed by the Wall Street Journal currently appears to be chimerical – again.
The all clear signal using the GDP growth rate continues to elude this 6 year recovery. The post mortem on the 1st qtr’ reveals that due to the rising US Dollar the fall in new orders and exports along with lower priced imports were factors bringing economic growth to a standstill. Investment in buildings and equipment as well as personal consumption also hurt economic growth. In fact looking at the 15 primary sub-components of economic growth in the Gross Domestic Product (GDP) there were only “”2″” that improved: a slight rise in Federal spending and a rise in business inventories. Higher inventories to some extent are a subtraction from future growth. This was a resoundingly weak GDP report and the 2nd quarter consensus which is still stuck at close to 3% will definitely come down as economists update their spreadsheets. With rising energy prices and a falling dollar in April as well as an eventual reflection of rising income and savings from the improving jobs market, we expect the 2nd qtr’ to arrive in the 1 to 2% range from the current perspective. Better, but not great.
Another sign of broader economic weakness can be seen here in durable goods orders at factories. It’s been more than 7 years since the previous December 2007 order peak and yet new orders placed at factories for hard goods remain below those levels . The lack of investment in new machines implies businesses are reluctant to expand and augers poorly for industrial growth over the next couple of quarters.
Earnings Continue To Keep A Lid On Stocks
The bad economic news we expected is a mixed bag for stocks. Bad news is good news in that recent economic weakness means that Janet Yellen’s Central Bank (The Fed) will definitely NOT hint at raising interest rates until the growth data is positive for a couple months. Virtually all estimates out there are forecasting at least “one” Fed rate hike in either September or December. Anyone who is correct on such announcement timing is just lucky as even the Fed has no idea currently. If the 1st 4 months of slow growth continues, trust me, the Fed will NOT raise rates. Once a new economic rebound is confirmed – higher prices, rising new orders, 4%+ GDP – then we can speculate upon the “Waiting for Godot” moment. (Samuel Becket’s play about endless waiting). So the good news is the weaker economy helps keep interest rates very low. The bad news is the weaker GDP, led by the energy sector contraction, hurts stock market earnings, valuations and forward guidance.
What’s Next For Stocks?
Every week and every month it seems we say that stock prices are mired in a trading range of uncertainty. So it remains. The sharp Thursday sell-off in stocks has been partially reversed Friday as you can see here on the chart. An old adage we created decades ago is that the ” 4th test of a support or resistance will break through”. We are already close to a 4th test with today’s reversal back up above 2100 basis the June SP 500 Index. A move into the 2110 – 2120 zone may be enough to panic stock prices higher [watch 18,200 – 18,300 Dow and 2115 – 2126 SP basis cash]. The caveat emptor is that any move back under the Thursday April 30th low at 2070 will shift the short term breakout odds to the downside. Should prices finally push out of the current congestion our chart shows where prices could accelerate to upon a clear breakout.
With the elevated US Dollar hurting exports and 6 years of sluggish home and factory building as part of a seeming perpetually weak economy, its hard to get excited about stock valuations fundamentally. Should pricing erode further sending US rates toward the German levels of zero % then another valuation multiple inspired stock market rally could take off. Technically the March and January lows will be key levels that if broken could signal the kick off to a mini Bear phase of over 20% lower in price as institutions run to the exits to catch their breath.
While we can allow one last short term surge to new highs all the way to a test of 2200 June SP (2175 – 2200 basis cash SP 500 Index). We would otherwise not be very excited about stock price appreciation from any 2nd quarter price peak until later in the year at the earliest. The long term picture should remain positive until inflation and rising interest rates can take hold for a couple years (2017 – 2018) when yield curves may begin to invert.
Last week we discussed that the dollar was cooling and to expect a further correction. This has come to pass as the US $ fell 5% over the past 3 weeks and may be reaching support in our 1st support zone in the 94 to 95.5 zone this week. The Dollar can rally a bit short term, but until the economic picture starts to rebound in the US we would not expect much appreciation unless Hedge Funds liquidate more of their holdings and the US economic data generates surprising strength. The massive long positions held by Large Specs and shorts held by Commercials allow the potential for a more serious Dollar correction should weaker economic data arrive.
Swiss Surges On Stronger Europe and Weaker Greece
One of our recent KDelta system futures trades subscribers could have followed was in Buying the Swiss Franc this week. The fundamental excuse for the Swiss currency rise was two fold: 1) Economic data of a stronger Europe is growing and 2) the Swiss National Bank (SNB) anticipates that the Greek debt crisis escalation will send the Greeks into Swiss Francs. The announcement that the SNB was going to Sell Swiss Francs to stop the currency from rising actually helped support the the rally as investors became more aware of the Greek flows thanks to the unintended consequences of the SNB. For Exec Spec the fundamentals matter very little other than for educational purposes here; our KDelta technical model indicated a Swiss Franc breakout at 105.79 that would test 108. The trade required less than 3 days for a very profitable investment of about 36% gross on invested capital.
Gold Not So Precious
In our recent Financial Sense interview (@ FinacialSense.com) we talked of the near correction coming in the Dollar that has now occurred as well as the trading range in Gold. We stated that Gold rallies would be capped by resistance in the lower 1300’s with continued risk this year of falling to new contract lows and possible even sub-$1,000/oz. Technically its hard to have high confidence in a downside plummet until the major support in the 1130’s – 140’s is broken. Seasonal lows are due this summer and global pricing pressures are starting to stabilize, but its too early to say that deflation risks have been dispelled. Until the 1300’s are penetrated we see no technical reason for a precious metals Bull market. Large Spec funds are mildly overbought in Gold which implies that any strong rally would generate extreme long positions levels setting up a larger Sell signal. A very sharp price drop to new lows would be required before Hedge Funds approached a neutral posture that is usually required before a secular uptrend can begin. Our primary targets from 2012 for reaching the 1100’s were satisfied, yet the maximum potential for the 900’s remains viable.
Oil Flowing Up Hill
A brief comment upon Oil: Our call back in January and February Exec Specs for a February LOW in Oil prices and rally into a seasonal May peak was accurate – so far. The risk then and now remains in the upper $30’s for WTI Crude Oil and our upside target remains in the 60’s to near 70 for any rebound. With the recent test of $60 the price forecast has unfolded mostly as planned and we would not be waiting for any test of new lows under $43 on the horizon. Readers will recall that we had a persistent Sell only forecast last summer with Oil over $100 a barrel for a few months. The 2015 forecast is more of a trading range still being carved out between the 40’s and the 60’s we suspect. Hedge Funds Oil long positions will move back to extreme overbought Sell territory should Oil continue to rally toward $70. Of the Oil products Heating Oil continues to have the most positive upside commitment of trader ratios.
Natural Gas Ready For Long Term Gains!
Natural Gas has surpassed $10 in 4 different years between 2001 and 2008. Since then prices have languished mostly between $2 and $6. That’s 7 years since Nat Gas has been in a Bull market. With prices testing historic lows in the $2’s, with record large spec fund shorts that risk getting reversed and the fundamental game changer of the US becoming an export nation in Nat Gas – this should be The Year to start investing in Natural Gas. One method for incrementally buying and holding Nat Gas is to buy the Exchange Traded Fund ETF with the symbol UNG. There are other ETF’s that parallel prices and do your due diligence, but we find this an attractive long term prospect for the first time.
Exec Spec by Kurt Kallaus
Disclaimer and Notice: Nothing herein, including any attachments, should be construed as an offer to sell or as a solicitation of an offer, or a recommendation, to buy any interest in any investment or other product. This may contain information on investments that are high risk and have substantial risk of principal loss. It is for informational purposes only. Statements in this communication that are not statements of fact are merely opinions or forward looking statements from a potentially biased source(s) that involve known and unknown risks, uncertainties and other factors that could cause actual future results to differ materially from any prior or projected results. Statements in this communication may be inaccurate and/or unsuitable for you. You must perform your own due diligence. Your investment decisions should always be made based on your specific financial needs, suitability, objectives, goals, time horizon and risk tolerance. Any decision is at your sole discretion and at your sole risk. You are advised to consult with your individual investment and tax professionals before making any investment. Past performance is no guarantee of future results.