Pullbacks are Part of the Stock Market Game
Having been away from my desk a fair amount over the past two days, the biggest question I have at the current time is if the current fears relating to the waning of global economic recovery expectations are real, or merely the latest excuse du jour for the fast-money to go the other way for a while.
Everybody knows that pullbacks are part of the game in the stock market. And most everybody could see that as of a week ago, stocks had become overbought again and that the major indices were struggling with resistance. Thus, a pullback – even one that produces four straight down days and some VERY ugly action in the energy/commodity/materials names – was to be expected. However, if the concerns about the global recovery are justified, then the current dance to the downside may have some room to run yet.
One argument for the type of action we’ve seen over the past week and a half is that the vacuum of data inputs in front of a very important earnings parade has kept the buyers on the sidelines and thus, allowed the bears to finally get something going to the downside. We note that the economic calendar has been sparse of late, that it is an options expiration week, and that the Q1 earnings season doesn’t really get going until tomorrow. Therefore, with the indices either at or near their recent highs, buyers may have decided to stand aside until the questions/concerns about the impact of oil/commodity prices on earnings can be answered.
Speaking of oil and commodities, it was another really ugly day in the energy patch yesterday. With Goldman Sachs continuing to espouse the idea that much of the recent run-up in commodity prices in general and oil in particular has more to do with speculation than global demand, more than a few traders have been fleeing the scene. And while we’re on the subject of the fast-money types, we should also point out that there has been a great deal of talk about the Yen carry trade being unwound due to another pop in Japan’s currency.
If this one makes you shake your head a little, join the club. However, the concept is as follows. The renewed focus on Japan (the upping of the crisis level at Fukushima Dai-ichi to the level of Chernobyl and yet another aftershock bearing a magnitude above 7.0) is causing the Yen to rise. Thus, anyone borrowing in Yen in order to make trades in other areas is now losing money on the “carry” portion of the trade. I know it sounds a little silly, but this is a big-time game for some of the big money out there and as such, we need to keep an eye on such matters.
Getting back to the matter at hand, the question of the day is if the global recovery is at risk due to what the IEA deemed “demand destruction” in the oil pits. In English, the question is if rising oil prices are going to cause consumers to use less crude products and/or pull back on their spending. On that note, a CNBC poll on Tuesday showed that 53% of those surveyed said that higher gas prices were already affecting their spending habits.
However, given that there is very little concrete evidence at this stage of the game that supports the idea that the economic recovery is at risk, we’re going to suggest that the current decline is based more on fear than data. As such, we would expect to see a healthy bounce the next time some good news actually hits the tape. I know, I know; the bears tell me that this is merely wishful thinking on my part and that stocks are headed down 20% from here. But until I get some data that justifies the view, I’m going to stick to the idea that this is a run-of-the-mill pullback that is likely to produce declines in the major indices of 3% – 5%.
But, of course, I will reserve the right to say I was wrong if the data begins to show that the fears are real.
Turning to this morning… The mood seems to have improved a bit after the first four-day pullback since mid-November. Earnings from JPMorgan, a decline in the Yen, and some improvement in tech appears to be responsible for the green on the screens in the early going.
On the Economic front… The Commerce Department reported that Retail Sales rose in the month of March by +0.4%. This was a tenth below the consensus for +0.5%. But, when you strip out the sales of autos, sales were up +0.8%, which was a tenth above the consensus for an increase of +0.7%.
David D. Moenning
Editor: The Daily Decision
