STOCKS:
The European debt contagion remains in place and is growing once again, China remains on a growth deceleration curve and there are concerns are of a hard landing — while the US is showing surprisingly positive data figures. Still, the risk of Europe on creating a global recession is high, although the US is better positioned than the rest of the world, which simply means that it shall outperform yet again this year.
STRATEGY: Technically speaking, the S&P 500 remains above longterm support at the 160-week moving average at 1130; which is critical given it delineates bull/bear markets. However, prices have reached into our 1350-to-1370 zone — a bit lower than expected, but the reversal lower in the NDX yesterday puts in the top in our opinion. Therefore, a correction of -5% to -8% is to be expected...for now.
WORLD MARKES ARE WEAKENING IN SURPRISING FASHION, and when say this it is due to a plethora of data out this morning that has confounded most analysts. But there is one theme that is clear in the surprises…and that is it is “weakness” anywhere and everywhere one looks. Be it in Dell’s earnings or Toll Brothers earnings; of European and Chinese PMI data – it’s all weaker-than-expected. So logically for once, the stock markets of the world are weakening too. Its seems that since a Greece deal isn’t the bullish news that it once was, market participants are looking around and trying to figure out the economic landscape they had forgotten about.
SURPRISE! EUROZONE PMI CONTRACTS: With the sovereign debt crisis still in place, although on hiatus it would seem from a sentiment perspective – we should note that economists were surprised this morning when the PMI report showed economic activity contracting instead of expanding. Those consensus-makers forecast a February rise to 50.8 from 50.4…but they got 49.7 instead. This reminds us of 2007 when all the economists forecast that the US and world economy would weather the sub-prime crisis that morphed into a credit crisis….this is still ongoing by the way. Could those very same economists be very wrong yet again? Yes; but the technicals don’t yet suggest an imminent larger top has formed; simply a short-term top.
ANOTHER SURPRISE!! China’s new export orders dropped in February according to HSBC; and they did so by the largest amount in 8-months. Again, expectations were for a rise
in export orders as the Lunar New Year holidays; which in our mind is a very worrying sign of the impact of the Eurozone debt crisis.
ON THE ECONOMIC FRONT: Today, there is only one report of consequence, and it is January Existing Home Sales. The consensus tells us to expect a rise from 4.61 million annual units to 4.65 million; estimates go as high at 4.75 million. With all the surprises this morning, we won’t be surprised if the existing home sales data surprises to the downside.
ANOTHER DOUBLE SECRET SURPRISE! TOLL BROTHERS REPORTS A LOSS: With the recent rally, there is quite a bit of optimism built into the markets, and the homebuilders have been one of the strongest groups against seemingly all odds. This has led to many calling yet another bottom in the housing market, but this morning TOL reported a “surprise” 1Q loss, with weaker-than-expected revenue due to fewer deliveries. They delivered 564 homes versus 570 in 1Q last year, with the cancelation rate rising to 6.2% from a year ago levels of 5.7%. Moreover, TOL is up +16% since the beginning of the year, with CEO Yearly saying the market generally feels “healthier” than it did a year-ago. The numbers don’t bear it out however.
GREECE IN THE HEADLINES AGAIN?? Just when one thought it was safe to stop thinking about the past 2-year Grecian drama; Fitch Ratings goes and downgrades Greece’s credit rating to C to CCC; and will lower it once again once there is confirmation of the bond exchange – this time to RD – restricted default. After the exchange takes place, then Fitch will “re-rate” the new securities based on the agency’s assessment of its post-default structure and credit profile. In other words – this drama isn’t over yet – it’s just been put on hiatus for a short while. We all know Greek can’t meet the terms of the agreement; the only question is when news of it not being able to do so hits the markets and the sovereign bond market as well as it will imply the German austerity measure route may be too onerous for Greece…and perhaps some of the other countries as well if Europe doesn’t pull out of the current slowdown.
TRADING STRATEGY: The market’s resilience continues to show “cracks” – and we do believe that the highs seen in both Apple (AAPL) and the NASDAQ 100 (NDX) last Wednesday suggest that the rally is over for technology, and soon to be over for other market sectors. One could easily point to the rise in crude oil prices to $106/ barrel and the concurrent rise in gasoline prices as being a headwind that is perhaps the “black swan” that no one is anticipating as they focus upon the Eurozone.
We are long Energy and Gold Shares; and we are short of Technology Yesterday, we pared back our energy exposure by selling Devon Energy (DVN). For now, we’ll stand aside, but will note that we won’t be surprised by a corrective consolidation to digest the gains seen; and we may very well move again to simply moderate our energy exposure even further given the market stands at such extended short-term levels. Furthermore, we are predisposed to add to our short Technology position by adding another 10% exposure to QID…and looking to add further gold shares positions on corrections.
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