This week's news was mostly bullish. The LEIs continued to increase and the housing market is still growing. Weak industrial production growth was the only negative. As for the markets, they continue to consolidate recent gains. Although they are expensive, the solid economic and earnings news provides ample support for their current rally.
The Conference Board released the latest leading and coincident indicators; both were positive. For the 3rd consecutive month, the LEIs rose .6; 9/10 components rose. The CEIs were up a smaller .3, but all 4 components contributed to the rise. Most importantly, the 6-month rate of change for the LEIs was up 2.3% and the overall pace of change is increasing:
Eventually, this higher rate of change should lead to a faster rate of growth.
Industrial production continues to languish: it was unchanged for the month:
The top chart shows the overall pace of growth, which has slightly increased since 1/16, but not by much. The middle chart shows the breakdown of major industry groups. The good news is the increasing pace of mining growth, which shows that the oil and gas industry is gaining momentum. But the other two component are weak. The lower chart shows the largest market groups, all of which have moved sideways for the better part of a year. Overall, this coincidental indicator does not inspire a great deal of confidence.
Although retail sales only rose .1% M/M, it increased 5.7% Y/Y, keeping pace with the strong growth in PCEs:
Finally, the housing market provided very encouraging news. The National Association of Homebuilders market sentiment reading rose to its highest level in 12 years. While building permits declined 6.2% M/M, the report’s details show that a 27% decline in 5+ unit starts was the primary reason for the drop:
Meanwhile, housing starts rose 3% M/M and 6.2% Y/Y, continuing the positive news from this very important sector.
Economic Conclusion: this was a good week for the U.S. economic news. The one laggard was industrial production, which continues its overall sideways trend. But the housing market continues to grow and consumers are still spending.
Market Overview: this week was about consolidation:
The SPYs have rallied about 16% since the election. Most importantly, the technical advance is very solid, broken down into a rise, a consolidation and a second advance. Since the beginning of March, prices have consolidated in a slightly downward sloping pattern.
The QQQ (NASDAQ:QQQ)s are also in a solid uptrend:
But the mid-caps and small caps are on a different trajectory:
The mid-caps (top chart) have a slight upward trend but the IWMs (NYSE:IWM) are moving more sideways. In both cases, this action is probably a longer consolidation of the post-election rally.
So, where does this leave us? There are strong fundamentals supporting the market: the economy is growing, sentiment is rising and business profits are positive. Higher valuations are the only negative. In this environment, and sell-off is profit taking and an eventual buying opportunity. But also remember this: the market has already risen over 10% this year. If it simply moves sideways, it’s still done well by historical standards.