The market appears to be running into some technical problems at the same time that the fundamentals are showing signs of deterioration. This is the first week this year I remember there being a slew of negative reports. Just about all economic releases this week have tended to be disappointing, while the global economy is either in recession or reporting slower growth.
At the same time the situation in Cyprus is still festering, they may or may not remove the lock down on depositors withdrawal limits in the coming weeks, but when they do, I can see a lot of money being removed to safer shores.
Then there is Italy, it is without leadership and North Korea is making serious threats, while Japan is embarking upon unprecedented massive easing that is most likely to set off a global currency war to see who can devalue faster. Dangerous indeed.
The market is showing signs of divergences that usually show up at market peaks. The Russell 2000 has been underperforming the S&P 500. Small caps and growth stocks, which I focus on, have not faired anywhere as well in this bull run as they would normally do in a bull market. This uptrend that began in November, and particularly since the turn of the year, seems to be more about large caps and mutual fund inflows. All the money has gone to blue chips, ETF’s and indexes.
The economy also appears to be cooling off after a decent start to the year. Weekly unemployment claims jumped to 385,000 compared to estimates of 347,000. The ISM manufacturing index dropped to 51.3 from the previous month’s 54.2 and estimates of 54. The ISM non-manufacturing index declined to 54.4, its lowest number since August. The ADP employment report dropped to 158,000 compared to an estimate of 215,000. Now today we have the March Non-Farms Payrolls number come in at 88,000 jobs when the expectation was around 200,000…oops!
Adding to the global problems, the Japanese central bank has announced its intention to begin a massive and unprecedented easing program with the aim of doubling central bank assets within two years and increasing the inflation rate to 2% after more than 20 years of deflation. The plan is to buy the equivalent of $75 billion of various types of securities each month compared to the U.S program of $85 billion—and keep in mind that Japan’s economy is only one-third the size of the U.S. One important result will be a significant devaluation of the Yen in attempt to make Japanese goods attractively priced in world markets. The problem is that other nations will also have to attempt devaluation in order to protect their economies, resulting in a deflationary global currency war.
Bottom line, we will see this market topping out now. I think “sell in May and go away” has arrived early, so I am going to stick my neck out and say that I think 1570 was the top for the S&P 500 for the next couple of months, so I will be heading for the sidelines soon, at least till we see a correction down below 1500. But, as always, I will let my system tell me when to get out.
May today be a profitable day for all of us!