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Clearly I've got to leave the country more often.
The market bottomed and began to rally just as I left for India on February 6th. Since then, the S&P 500 has rallied 5.8 percent. The Dow Jones Industrial Average is up more than 800 points. Even emerging market stocks have rallied.
Despite poor economic statistics, most recently January U.S. retail sales on Friday, the rally has been largely off of cyclically oriented names.
S&P futures dropped while Tom Demark, a famous technical analyst, was on our air, saying the next couple days were critical, and that if stocks moved down in the next couple days they would continue to fall no matter what the jobs report said on Friday.
Maybe. It was widely noted Mr. Demark is selling market timing seminars, one of which he is doing today in New York.
Yesterday's volume of nearly 4.2 billion shares was heavy but not as heavy as Monday's selloff; breadth was 3 to 1 advancing to declining stocks, good but not great.
(Read more: Bonds beating stocks in 2014...so far)
In other words, the selloffs are coming on greater breadth and volume than the rallies. We need to see that moderate.
In Japan, the Nikkei rose 1.2 percent, fueled by decent earnings from Toyota and Panasonic.
(Read more: What Wall Street's looking for in Disney earnings)
Another issue impacting the market are perceptions of Fed tapering. Traders will be listening for any comment on whether the taper will continue. Fed hawk Charles Plosser (Philadelphia Fed) and moderate Dennis Lockhart (Atlanta Fed,non-voting member) are speaking today. Yesterday Chicago Fed President Charles Evens said it would take a "high hurdle" for the Fed to move away from tapering, one reason the rally was rather muted.
Steady as she goes is good enough...for the moment. An old trader friend of mine said today was like drawing a pair of twos in a poker game...what do you do when you draw a pair of twos? You don't raise, you don't fold...you wait for another card.
The other card is economic data, particularly the Nonfarm Payroll report on Friday. ISM Services tomorrow is important because the service part of the economy is a little less sensitive to weather. A decent number, particularly the employment component, will be a big help for bulls.
We also get the ADP report tomorrow, which was not a very good predictor of the weak December jobs report.
With that said, all this discussion that the Federal Reserve may stop its taper program is way premature. They would have to be convinced that the U.S. economy is showing undeniable signs of a slowdown in the economy, and you don't get that from two data points.
A lot of people have come on our air saying that if we get another weak jobs report on Friday, on top of the weak December report, that would be sufficient for the Fed to consider stopping the taper program.
I don't buy that. I don't buy it because 1) there is a heavy weather overlay to the report, which clouds the results, and 2) even without weather, the Fed will need more evidence before they decide to halt or reverse the train. They stand to lose a lot of credibility by stopping the train, then realizing two months later that there was only a temporary blip in the data.
And remember, the next Fed meeting is not until March 19th. That means we will get another jobs report--for February--before they have to decide.
An improved February report, even if the January number is disappoint, would change the conversation.
Elsewhere: Pure nat-gas plays soar. With natural gas up over eight percent, passing $5, exploration and production stocks like Pioneer Natural Resources (PXD) are up three to four percent, but a subgroup of players that have heavier exposure to natural gas and very little exposure to oil are especially strong. Companies like Quicksilver Resources (KWK), Ultra Petroleum (UPL), Southwestern Energy (SWN) are up four to seven percent.
For the moment, the markets are a bit calmer. While Asia was weak overnight, emerging market currencies are mostly stronger, European equities are mixed, and U.S. stocks opened in positive territory after a bloody Monday.
Many large European banks are up 1 to 2 percent and the yen—a safe-haven that is a gauge of market fears—is slightly weaker against the dollar. Yet the nervousness remains, since the weak ISM print has many fearful that the nonfarm payroll report on Friday will be weak as well.
The Great Rotation has arrived! In reverse: Out of stocks, into bonds!
The market opened and almost immediately began drifting down, but the disappointing reading on the January ISM (51.3, well below the level of 56 expected) dropped the market further.
The ISM is full of comments from respondents to the survey blaming weather:
It seems clear that weather has had an impact on the economic data, but it's difficult to say how much.
What is clear is that traders are in no mood to give the market a "get-out-of-jail-free" card on the weather, and that makes sense. After all, weather is a non-recurring event. More worrisome is concern that the consumer may not be as great a shape as assumed, and that may be the reason car sales are disappointing (though the auto execs do not seem worried).
This suggests that many professional traders are using ETFs to lighten up on their exposure.
Mid-caps and small-caps are notably underperforming the big-cap S&P 500 today; part of this is due to a slightly higher beta for small- and mid-caps. Liquidity issues also matter because these markets are nowhere near as big as, say, the S&P 500 futures market, or even the Nasdaq 100 e-mini market.
Regardless: What's clear is that many have tried to exit at the same time, and you know what happens then.
So where's the money going? Into bonds! Mostly short-term. The iShares 1-3 Year Treasury ETF (SHY) is seeing roughly 15 times its 30-day average volume (!). The iShares 3-7 Year Treasury (IEI) is seeing over 30 times normal volume! Even corporate bond ETFs like the iShares USD Investment Grade (LQD), the largest corporate bond ETF, is seeing roughly twice normal volume.
The bigger picture, as many traders have noted to me, is that the investment outlook is quickly changing: "The consensus narrative heading into 2014 was that stocks are the place to be, bond yields will rise (albeit at a more moderate pace), and avoid any interest rate-sensitive assets," one ETF trader wrote to me. "We think expectations got ahead of market fundamentals...Yes, the economy is still recovering. Yes, stocks will be better plays over the long term. But, perhaps, things will take a little longer to heal than most think. Markets were priced for perfection, so any disruption to the narrative predictably hit risk assets."
First, the good news: we have safely put a grim January in the rear-view mirror, and we are still in the middle of the "Best Six Month" theory, (the theory that the Dow Jones Industrial Average consistently outperforms in the six-month period between November 1 and April 30th).
Now, here comes the bad news:
One thing's for sure: I find it hard to believe that the overnight weakness is due to a drop in euro zone prices. The yen is stronger, and the Turkish lira is down again as investors flock to safe haven U.S. debt.
We continue to grapple with emerging market fallout, due to lower liquidity stemming from the Federal Reserve's tapering policy. These conditions cannot be solved by some magic bullet.
Thursday is the biggest earnings day of the quarter, with roughly 10 percent (56 companies) in the S&P 500 reporting. So far, we have almost over 45 percent of the Index reporting results.
As it stands, earnings growth is at 7.3 percent—the best showing since the 7.7 percent rise in the fourth quarter (Q4) of 2012, with 65 percent beating expectations (about average), according to S&P Capital IQ. Collectively, revenue is up 3.5 percent.
Futures rallied as Q4 GDP came in up 3.2 percent, with the price index up 1.1 percent as expected, still well below the Federal Reserve's target. However, most traders are very focused on the January numbers; unfortunately PMI/ISM won't hit until next week.
The Federal Reserve statement continued its tapering program as expected, but other than that the statement was essentially unchanged, with no change in the forward guidance.
There was no nod to emerging markets, not even an indirect nod toward "recent market volatility" or any other vague stand-in term.
This, to my mind, is a sign of strength. The Fed seems to be increasingly confident that the economy is growing modestly, and judging by the reaction of the bond market (the 10-year yield fell below 2.7 percent, first time in two months), they are convincing many players that tapering is indeed not tightening.
But modest growth does not mean robust growth, another reason bond yields may be moderating. I mentioned this morning that many of the attendees I spoke with yesterday at the ETF.com Inside ETFs Conference in Florida believe the taper means growth will slow, so they are more cautious on equities in anticipation of Q4 being the high GDP print for the cycle.
As for emerging markets, they have generally reacted negatively to the Fed announcement, with the main Emerging Market ETF (EEM) briefly fluttering, then moving to the lows of the day.
Bottom line: The Fed went as far as it could to continue the taper and keep everything else unchanged. Given there was no press conference, it was probably a smart move, even if it means a modest down move for stocks.
One thing is for sure: The market weakness is not because earnings are terrible. We are one-third the way through earnings season...169 companies of the S&P 500 has reported so far. We have earnings growth of seven percent, the best showing since the 7.7 percent rise in Q4 2012. About 70 percent of those reporting are beating on earnings (above the average of 65 percent). Revenue growth of 3.5 percent is also strong.
Despite some high-profile guidance disappointment, such as Boeing (BA) today, 40 companies have provided earnings guidance, with 25 negative, 15 positive, for a negative/positive ratio of 1.7. Historically, that ratio has been 2.4 over the past 15 years.
At first glance, it seems to me that the price decline for those who disappoint on guidance is steeper than it is in the past. BA is down 5.7 percent; EMC (EMC) down 3.2 percent, Tupperware (TUP) down more than six percent. But this is the problem in a down market: Stocks decline on their own news as well as to a general decline in the market, which makes the decline worse; in a rising market, the sell-off is not as steep even in those stocks that disappoint.
Once again, we are at one of those strange moments in modern trading where an obscure currency—the Turkish lira—is being watched carefully this morning, specifically the dollar/lira relationship.
Why? Because the aggressive actions by the Turkish central bank overnight--raising their overnight lending rate from 7.75 percent to 12 percent--are being watched to see if that kind of strong medicine will stabilize the markets.
Many traders are not trading—they just appear to be watching.
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