The economic data came out lukewarm yesterday. Initial Jobless Claims rose by 25k from last week, but the moving average appears to be getting a little stronger albeit not enough to make any change in the unemployment rate.
The Consumer Price Index ex Food & Energy (MoM) came out at .2% versus expectations of .1%, and this is the number the media touted as being mild or under control. However, the real number that effects our spending and pocketbook, CPI (including food & energy) came out at .4%. This means our real cost of living just increased by this amount. If you annualize this it is almost 5% assuming it doesn’t accelerate which I believe to be wishful thinking.
In any event, our markets showed resilience in the afternoon. The markets sold off in the morning on the news but then rallied. The DOW, S&P, and NASDAQ ended positive between .2% to .31%. The NASDAQ was the weakest, especially the NASDAQ 100.
Up Volume on the NASDAQ was only 60% and marginally stronger at 67% on the NYSE according to Lowry Research. Total volume has been declining over the past few days especially on the NASDAQ. Breadth was more than 3 to 2 on the NYSE and less than 3 to 2 on the NASDAQ again illustrating the underlying weakness in the NASDAQ.
The weakest sectors are consumer, healthcare, telecom, and financial. The strongest sectors are utilities, materials, and the precious metals. Gold was up almost 2% and silver was up 3 2/3%. Most of the commodities were up with cotton spiking over 7%.The dollar strengthened against the Euro and the Yen. So we did see gold, most commodities, and the dollar go up in tandem today.
Once again I must stress that the market is overbought and the risk is high even though the market keeps trudging upward. Buying has been weakening over the past few days but selling has not come into the market. Without selling increasing, you are not going to get a significant selloff. The key now is selling volume relative to buying volume.
Treasury yields came down today and their corresponding bond prices rose. The dollar strengthening and the “mild” inflation could be one explanation, but I believe there is another.
Remember a few days back I told you that the European finance ministers increased their lending facility (for emergencies) from 250 billion Euros to 500 billion without much explanation. Well, use of the European Central Banks lending facility has also increased dramatically. This is the emergency facility available for banks.
Additionally, credit default swap (CDS) spreads in the financial sector (banks) over in Europe, essentially insurance against default, have been going up significantly over the past week. Something is brewing over in Europe.
This could also explain why there is a “flight to quality” into Treasuries away from European bonds. If you are short Treasuries, be careful in the short term. In the long term, rates are going up, but in the short term, anything is possible.
We need to keep a careful eye out for any news or hints about events unfolding in Europe.
