Sorting It All Out
Price Headley
BigTrends.com
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There was certainly plenty of news for investors to mull over last week, so let's just dig in and sort all of it out.
April's CPI edged up by 0.2 percent, where analysts were expecting to see a 0.3 percent increase. This is a sign that the inflationary pressures felt by consumers weren't quite as great as originally thought. On the other hand, the Core CPI, which excludes food and energy, was 0.3 percent higher last month. This topped the expected increase of 0.2 percent and was the primary cause of the initial negative reaction on Friday. Most experts were fully aware that increased energy and fuel costs would drive up the CPI at least slightly. In fact, they overshot their forecasts. But these same experts weren't expecting to see significant costs increases in healthcare, education, and housing. These broad price hikes that cover many industries strengthen the case that inflation is being felt everywhere - not just in the price of oil. We also learned that the Producer Price Index increased by 0.7 percent in April. This was one of those signs of inflation, which at this point has become redundant.
Business inventories increased more than they were expected to. Rather than a 0.5 percent lift in inventory levels, we actually saw a 0.7 percent rise last month. On a related note, capacity utilization is now at 76.9 percent, topping the expected 76.7 percent. Industrial production was 0.8 percent higher in April, above the forecast of a 0.5 percent increase. But all of these are part of the same equation: consumers want more, and the producers and factories are more than willing to bump up their output to meet that demand. This verifies the bigger trend of growing consumer demand, which is technically driving some of the inflation we just mentioned.
The general trend in employment shows continued improvement, with 331,000 new unemployment claims filed the previous week. The four week average of new claims is at the lowest point it's been since November of 2000, so nobody should still be making the 'jobless recovery' argument. In fact, the impact of more and more discretionary income is being felt in the economy, as the general trend in retail sales still shows tremendous spending growth, despite April's dip in retail revenues.
The one disappointing announcement was the Michigan Sentiment Index. May's reading of 94.2 was slightly under the consensus of 96.0. Although the difference was slight, it was the only data on Friday that suggested a weakening degree of consumer demand. However, this is a figure that should be taken with a grain of salt, as far as the stock market is concerned anyway. The Michigan Sentiment Index report actually topped estimates back in March, and the market has been falling ever since then. Certainly we've all heard the old adage "do as I say, not as I do". The Michigan Sentiment figure can safely be approached with that same frame of mind - the consumer may say he or she is holding back, but the other data proves otherwise. The trick is balancing the effects of opinions and the results of facts.
In the long run, we’d rather base investing decisions on facts instead of opinions. But on the other hand, the negative opinions can take a toll on stocks. That's why we look at all the data we can, which brings us back to our key point from yesterday. All the economic data still tells us the long-term bulls are going to be amply rewarded, but the near-term still doesn't really look all that promising.
As for this week, the market took its third week of losses, although they were only minor in the grand scheme of things. These weekly losses are also coming on lighter and lighter volume, so the number of sellers is shrinking. In other words, the bottom of this pullback is at least in the foreseeable future, but it doesn't mean that we're at the bottom yet. The challenge the market is going to be facing starting now is just lethargy. The spring and summer periods of the year usually coincide with a stagnant market, so even if stocks do start to look really attractive, there aren't going to be too many interested buyers; they'll all be on vacation or at the ballpark. That's part of the reason that total trade volume is shrinking. In some respects that can be a good thing, as it also means the sellers aren't active either. But given that we've entered into this period of the year on a less than positive note, stocks are not as well positioned as they could be right now.
The tug-of-war between the bulls and the bears right now is also showing up on our chart of the Dow Jones Industrial Average. After hitting the 10,000 mark in Monday's tumble, the Dow spent the rest of the week floundering just above and below that line. It's an understandable pivot, with the 10,000 level probably being the single most important psychological benchmark of the market. We closed just above that line for the week. However, we also closed just below the 200-day moving average this week - probably the second most important line in chart analysis. Based on those two lines alone, we have to be neutral on the Dow. However, taking a step back and looking at the bigger picture, the Dow now has made a pattern of lower lows and lower highs. That's more bearish than bullish, so we're not overly hopeful about our short-term prospects. As you read in our other analysis though, we're still optimistic about the market's long-term potential.
Price Headley is the founder of BigTrends.com, which provides investors with specific real-time stock and options strategies and investment education to profit from significant market trends. Timer digest recognized the success of BigTrend.com’s investment strategies by ranking Price among the Top 10 Market Timers for stock market timing for the 2000 calendar year.
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