CAPITAL MARKET COMMENTARY
WORLD STOCK MARKET PRICES ARE “MIXED” COMING INTO NY TRADING:
It would appear that the North Korean and Iranian situations aren’t necessarily on the “front burner” any longer as the effects aren’t perceived as negative for the time being; traders did in fact decided to “take of some long exposure”, which is really rather reasonable. Today also brings its challenges; crude oil is now trading around $75/barrel, which given it is within 50 cents of its contract high…puts today’s weekly energy inventory report in the spotlight. If gasoline inventories fall more than expected – then we would expect gasoline futures to trade to new contract highs…carrying crude oil on its coattails. Also of early significance – the European Central Bank will decide on interest rates today; the repo-rate stands at 2.75%, but they are expected to rise to 3.33% by September given current Euro-libor rates. Let’s be clear…rates may not rise today, but they are rising in the future.
Moving back to market sentiment, we find traders are moving on this morning to premise that all dips are to be bought given the global uptrend in stocks. However, we think the uptrend was broken back in May with the violation of nearly every bull market trendline one could find. This most recent rally is nothing more than a countertrend rally in an emerging bear market; we don’t make this case lightly, but do so given the inexorable rise in interest rate yields and the fact the underlying technical make-up of the stock market is rather “punk” and deteriorating.
Remember; bull markets don’t roll over and die easily – they die with a great deal of “trepidation”. Time and time again rallies are mounted, and time and time again those rallies are pushed lower as selling pressure from resistance levels outweighs buying pressure. Too, fewer and fewer stocks participate in the uptrend; when the leaders falter – so too shall the army of stocks behind them. We consider the commodity stocks such as Phelps Dodge (PD) as the cyclical bull market’s leader; it has faltered, but hasn’t faltered as badly as its underlying commodity copper. This is exactly the situation we have today in the US and the emerging markets; but to a lesser degree in Europe.
As such, the selling remains rather concentrated in Asian shares this morning, with Japan and South Korea leading the charge lower; they both closed lower by -1.3%. This has pushed the S&P, NASDAQ and Russell 2000 futures higher…with the S&P leading the pack. That said, we do find it rather curious that once again, the Hong Kong and China share markets closed higher on the session by about +1.0%. This continues the trend of China-related shares moving higher in both absolute and relative terms versus the world. We do think China is set to outpace most share markets in the months ahead on a relative basis; the absolute basis at this time is a bit more tenuous however. If one wants to be long foreign share markets…then clearly Chinese ADRs are the proper instrument to consider.
TRADING STRATEGY: Yesterday we moved to establish outright short positions in the Global ETF Portfolio; while adding short positions to the PTP Portfolio to bring it back to a more neutral level from an aggressively long position dominated by oil-related issues. Today, we want to see further follow-through lower in our new positions; we want to see the advance/decline figures deteriorate as well, and we want to see our positions insulate themselves from random noise.
We moved short given interest rates were moving higher, which coupled with the risk/reward dynamic of putting on short positions just below their recent highs made a great deal of sense. We may be wrong in moving short at this juncture, but given prices tested and failed to penetrate their intermediate-term moving averages as well as their 50%- 60% retracement “boxes” – the table was set for an aggressive trade. Our stop losses are set at the recent highs; it is a non-emotional “stop out” point, and we look for new relative lows in all the issues we put on.
ON THE ECONOMIC FRONT: Yesterday, bond yields rose sharply after a surprise jump in the ADP National Employment Survey report to +368 thousand private jobs from a consensus +190 thousand; this increased expectations for a much larger-than-expected June non-farm payroll number to perhaps +300 thousand. This now puts today’s June ISM Services index number into the spotlight, with the employment and prices paid indexes getting the most attention. The headline figure is expected to have declined modestly from 61.1 to 59.0; with the employment index expected to have “declined” to 54.0 from 56.0; prices paid is expected to remain upwards of a 77.5 reading.
For more information about The Rhodes Report click here
