Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
People who wanted nothing to do with stocks now are stabbing each other in the back to get their grubby hands on them because “the Fed will save us”. (again) The psychology of the market and how quickly it changes never ceases to amaze me, even as we’ve seen the song and dance many times. This is why I laugh at those who say the Fed is nearly out of bullets – look at how the market has ignored a host of bad economic data, and a continent gone AWOL the past few weeks.
A lot of short term technical readings are now flagging overbought as the “front run the FOMC meeting” rally continued yesterday. The chance for a short term negative reaction increases with the type of run the market has gone on here lately. Consensus is for an extension of Operation Twist for a few months and then very dovish language which I suppose sets us up for QE right into the heart of election season? That will be interesting politically if it happens. (The last 2 meetings of the year are Oct 23-24 and Dec 11-12; can you imagine a QE announcement 2 weeks before national elections?) However one would think if this (Twist/dovish language) is what happens today, that is “in” the market as accounted for by the flood of buying the past 3 sessions.
So are we back to where we were early in the year and all systems go – buy anything that moves because the central bankers are here to save us? Too early to tell. Yesterday a lot of beaten up sectors that are dependent on global growth surged – these were the same groups that on the first day of 2012 came to life out of nowhere and ran for 4-5 weeks for no particularly good reason other than … well the central bankers have saved us (LTRO, Twist, blah blah). Of course we saw those moves completely unravel as the year went by but in the shorter term the movement of markets is dominated by lemmings and their thoughts, so the timing of when hope versus reality mix is always the tricky part.
This morning Procter & Gamble cut guidance and I expect this to be a reoccuring theme in July earnings season as the back half of 2012 of S&P 500 earnings is expecting fantastic things. (FedEx wasn’t all that hot yesterday either)
- Slower growth in China and tough markets in Europe and the United States prompted Procter & Gamble, the world’s largest household product maker, to cut its growth forecasts on Wednesday in the midst of a $10 billion cost-cutting programme. The U.S. maker of Tide laundry detergent, Gillette razors and a host of other products also blamed the strong dollar and higher commodity costs for hitting growth.
- Chief executive Bob McDonald said growth in developed markets, making up 60 percent of sales, had dropped off significantly. The tough trading prompted McDonald to cut his forecast for the group’s April-June fourth quarter to underlying sales growth of 2-3 percent, down from 4-5 percent.
These expectations seemed far too high even in a steady state global economy, not to mention one that is slowing. But of course we have the central banks… UK inflation came in light yesterday so now the Bank of England can ease. The U.S. can/will imminently ease (or extend if you will). People are counting on the ECB to cut rates at the next meeting and perhaps do more as a goodwill gesture if there is progress at the government level in Europe. And China just cut their rate for the first time in 4 years.
So you see the game here – corp profits are going to suffer and potentially completely flatline (ex Apple) on the S&P 500. But central bank after central bank will ‘rescue’ us. With slowing revenue, profit margins being squeezed, and earnings flagging the great hope must be “multiple expansion”. Which usually does not happen in a slowing global economy – but of course we no longer live in usual times.
FOMC decision just after noon then Ben’s conference mid afternoon today.
The S&P 500 burst through that 50 day moving average yesterday on the back of broken sectors such as banks, miners, natural resource stocks, etc. and stopped at the 100 day. This just so happened to be the 61.8% retrace of the entire fall from April to June. Again we are short term extremely overbought and the ‘giddiness’ factor due to central bank intervention has become almost overbearing already. Rather than a “V shaped” move to continue bulls would be better served by some “backing and filling” and digestion here – but one that holds the upper 1330s. But expect the normal whipsaw this afternoon – perhaps twice.
Intermediate term this breakout from an inverse head and shoulders does seem to be happening which would be constructive.
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