WORLD STOCK MARKETS ARE HIGHER THIS MORNING:
We don’t find this surprising whatsoever given recent weakness has been predominately situated in Asia, but the level of those gains appears to be characteristic of a countertrend rally. If we look at Japan’s NIKKEI, and we do so given we believe she is representative of the rest of Asia, we the NIKKEI was -8.2% lower from the April 7th high into yesterday’s close. Normally, we would expect a countertrend rally to be on the order of several percentage points; this is how the NIKKEI has traded in recent months. But the fact of the matter is that she could only muster a +0.9% gain overnight on less-than heavy volume is consistent with a countertrend rally. Volume expands into the declines, and dries up on rallies – this is clearly bearish behavior. And weare seeing it in S. Korea and Hong Kong as well.
In Europe, the most curious circumstance occurred overnight, in which a majority of Bank of England governors voted to keep interest rates at current levels. What is surprising is that one governor wanted the rate to go higher; and another for the rate to go lower. We cannot in recent memory think of when this circumstance has presented itself; we know it has happened before, but when escapes us. Further, the FTSE stock market index can’t stand the confusion – she is trading lower by 126 points or -2.15%. We also say – confusion breeds contempt, and contempt breeds lower stock prices. This is a case in point; if the BOE is split on rates…we are absolutely sure there is the same dissention at the Fed. But they will take an important point of this confusion…they will at least appear together.
TRADING THOUGHTS: After Thursday’s and Friday’s sharp decline from S&P 1326, prices have essentially gone sideways in what appears to be a short-term consolidation to new reactionary lows between 1255-1280 – which are the February and April reactionary lows. Perhaps the inflation data today will be the catalyst; but what happens afterward is what we are focused upon at this very point in time, for our hourly model that marked the February, March and April trading lows is back to oversold levels once again. This suggests any decline will be short-lived, with a tradable rally thereafter. However, we want to make an important distinction here – we don’t expect new highs, and we do expect this countertrend rally to “fail” if prices reach as high as 1300-1305 – a level where we expect to become more overweight short. Hence, how we get to this level dictates our trading strategy; a drop to lower levels would necessitate putting on long positions at the expense of covering short positions, whereas just rallying to 1305 would mean exiting long positions at the expense of putting on short positions. We hope this is clear.
INFLATION AND HOUSING DATA…ONCE AGAIN: Yesterday, we were treated to a “mixed” PPI report that showed overall PPI rising at +0.9% vs. +0.8% consensus, with the “core PPI” rising a rather anemic +0.1% vs. +0.2% consensus. This seems to indicate that finished goods prices aren’t accelerating as the year/year core figure rose only +1.5%...which is down from March’s +1.7%. However, digging down into the report one doesn’t become so easily swayed; intermediate prices rose +0.4% from March’s +0.1%, and was led by a +4.7% rise in core crude prices. The market didn’t focus here though, they chose to focus on the fact year/year finished goods prices were down; or even perhaps the sharp rise in bond market yields had discounted something far worse, and decided to price yields based on the new data. We think this reasonable, and we think it reasonable that there were just too many short positions in the bond market, and given bond yields have stabilized lately…those late to the party simply covered their positions in lieu of fighting another day.
Today brings us April CPI; overall prices are expected to have risen +0.5%, while “core prices” consensus stands to show a +0.2% gain. Last month, both the overall and core rate CPI surprised on the upside to the tune of +0.4% and +0.3% respectively. One month doesn’t make a trend, thus traders will be focusing intently upon this figure to see if pricing pressure hits the core rate due to rising energy and commodity prices. Eventually in our opinion it shall; but whether it is this month or next month or soon thereafter we don’t know. What we do know is that airline ticket prices are “sticking”, that energy delivery surcharges are “sticking” and our overall expenditure level is increasing. A poor core rate number today will “erase” yesterday’s bond market gains; a good number will build upon those gains given the level of outstanding short positions.
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