Navarroâ,"s Big Economic Picture
Wow! That was an absolutely stunning performance by the U.S. markets last week. In the face of what was a continued weakening of the economyâ,"s main driver of late â,“ the housing sector â,“ and despite a startling shortfall in the GDP numbers â,“ a meager 1.1% for the 4th quarter of 04, the markets motored on upwards, partying like it was 1999 â,“ or, perhaps more accurately, January of 2000.
The conventional wisdom is that the markets liked the low GDP numbers because it hastens the day when the Fed will stop ratcheting up interest rates. The more likely scenario, as astutely pointed out by Michael Santoli in Barrons, is that the market is experiencing a classic â,"January effectâ, in which money pours in from a variety of pension and mutual funds to bolster the market at the beginning of the New Year.
Technically, clearly there are momentum factors in bullish play. But if you look at the three major indices â,“ SPY, QQQQ, and DIA â,“ my bearish eyes see either double or triple tops in the making. This view is supported by the fundamental perspective as no market has ever flourished during a regime of high oil prices and relentlessly rising short term Fed rate hikes. (And any technicians out there, please send me an e-mail if you share or challenge this view! pn@peternavarro.com Therefore, I still expect that this market will not extend (much) beyond its 52-week highsâ,¦.
Navarroâ,"s Macroeconomic Calendar & Market Movers
Itâ,"s a packed calendar this week, and my big market movers nominees include the Fedâ,"s rate decision on Tuesday, the ISM on Wednesday, and both productivity and the jobs report on Friday. Letâ,"s break it down:
MONDAY: If personal income exceeds expectations, that would help address one of the weaknesses of the economy â,“ income lagging behind growth. With consumer confidence in a nice uptrend, any hiccup would be bearish.
TUESDAY: The Fed is expected to raise interest rates. If it doesnâ,"t â,“ based perhaps on last weekâ,"s dismal GDP showing â,“ the bears will bleed up and down Wall Street and the question as to whether bulls can dance will be answered.
WEDNESDAY: Nobody expects auto sales on Wednesday to be particularly robust and they probably wonâ,"t be, as autos recede with housing in the stimulus scheme of things. I do see the ISM, however, as a potentially big market mover. It fell sharply last month and another drop down would reinforce the concerns voiced by the weak GDP numbers.
THURSDAY & FRIDAY: These will be defining days in the market. My bearish scenario here is a drop in productivity rattling inflation doves on Thursday, coupled with a second straight jobs number under the estimates. Dodge those bullets and maybe the week ends on an up note.
Either way, the big picture here with all these reports is LOTS of volatility â,“ and lots of chances to make money.
Hedging Your Bets With Matt Davio: Reflation
I wanted to discuss a topic that continues to be occurring in the worldwide markets again. â,"reflation.â, Reflation is defined as the intentional reversal of deflation through a monetary action by a government.
In the global economy, the U.S. government has been the primary instrument of reflation. Through a combination of tax cuts, heavy war expenditures and easy money, the U.S. has provided a strong catalyst to world economic growth, particularly in Asia. In the process, the U.S. has both monetized and fiscalized the worldâ,"s reflation.
Interestingly, the one major stock market index worldwide that has not benefited fully from this reflation has been the SP500. The accompanying chart illustrates how it is lagging deeply behind the rest of the worldâ,"s markets. The question of investors is whether the SP will catch up or whether the rest of the world will fall back â,“ as such divergences are difficult to sustain in asset markets.
As for the U.S. markets, we got the first shot of long suppressed volatility across the bow two weeks ago when the US indices tanked. However, this week we had an extremely bullish Advance/Decline number with the Advancers outpacing the Decliners at over 2 to 1 all week. Very bullish indeed.
While Fridayâ,"s GDP and Housing numbers were very weak, the market didnâ,"t blink and kept right on trucking. That said, the writing is clearly weakening for much upside. My speculation is that we should expect a big 10% downswing at some point following the 1st quarter of 06.
1) Technicals remain strong, and continue to be the driving force short term. But economics look weak, and continue to be a major source of concern long term.
2) Last Friday's market actions was the market's early warning sign. Very heavy volume to the downside on a big selloff is never a good thing. I interpret that day as a foundational crack of the cyclical Bull market. Again, we are not looking for a 1987 situation, but rather a Q1 topping out, and an ugly rest of the year.
3) Gold also looks toppy -- it's well overdue for a 10% correction. We are short here, but would re-establish a long position in the 480-510 range.
4) A 500 point day in Japan is too exuberant -- it's a sign of very emotional trading. Historically, these sort of buying frenzies tend to end badly.
Peter Navarro is a business professor at the University of California-Irvine, and can be contacted at pn@peternavarro.com. Matt Davio is a managing partner at the hedge fund, Red Rock Capital Fund, and be contacted for hedge fund services at redrock@peternavarro.com.
DISCLAIMER: This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever. Trading and investing involves high levels of risk. The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The authors may or may not have positions in the financial instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future performance.
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