Stocks rallied to kick-off the holiday-shortened week on better than expected
economic news. From Bloomberg:
The Institute for Supply Management's (ISM) manufacturing index increased
to 50.9 in June from 49 a month earlier, the Tempe, Arizona-based group
said today. The median forecast of 85 economists surveyed by Bloomberg
called for the measure to rise to 50.5. A reading of 50 is the dividing
line between expansion and contraction. Another report from the Commerce
Department showed construction spending increased 0.5 percent in May.
Hurdles From Fed and Technicals
If you read between the lines of last week's speech from
Fed Governor Jeremy C. Stein, it is fair to say the odds are high the Fed
has already decided to taper the bond purchase program at the September meeting.
Below is an important portion of Governor Stein's speech, which seems to say "we
have enough data in hand."
A key point is that as we approach an FOMC meeting where an adjustment
decision looms, it is appropriate to give relatively heavy weight to
the accumulated stock of progress toward our labor market objective
and to not be excessively sensitive to the sort of near-term momentum
captured by, for example, the last payroll number that comes in just
before the meeting. In part, this principle just reflects sound statistical
inference -- one doesn't want to put too much weight on one or two noisy
observations.
The technicals described in this week's video seem to reflect the expectation
from market participants that a tapering announcement is coming this fall.
Japan Provided A Spark
Investors seemed to put the concerns about Fed policy on the back burner Monday.
Instead they chose to focus on the ISM number and some better news from the
Land of the Rising Sun. From Bloomberg:
In Japan, the quarterly Tankan index showed positive sentiment among
large manufacturers for the first time in seven quarters. The measure
rose to 4 in June from minus 8 in March, the Bank of Japan said. A positive
figure means that optimists outnumber pessimists. Economists had predicted
a reading of 3.
Bulls Face Overhead Resistance
The question going forward for investors is whether improving economic data
can offset concerns about the Fed tweaking their bond purchase program. In
addition to concerns about Fed policy, the bulls also have three areas of
possible resistance to deal with during the remainder of the week. In the
chart of the S&P 500 below, the widely-followed 50-day moving average
is shown in blue (see point A). Downward-sloping trendlines (B & C) also
may act as resistance giving traders a reason to lighten up. The 50-day moving
average currently sits at 1623. A move above 1642 would be required to clear
both trendlines A and B.
Investment Implications
As long as the S&P 500 remains below the key levels noted above, we will
err on the side of maintaining a well-above average cash position. A weekly
close above both 1623 and 1642 would increase our openness to redeploying
some cash into stronger areas of the market, such as small-caps (IWM), mid-caps
(MDY), banks (KBE), and biotech (IBB).
