A very choppy market this week with the DOW Jones Index leading the way lower while the Russell 2000 and NASDAQ made new all-time highs. The broader indices are in a divergent state which brings confusion to the overall health of the stock market. In my last issue, things looked promising but with the DOW index closing lower for 8 session in a row, there may be a trend change at hand to the downside. Divergences are what you see at or near tops so it is time to be cautious until there is clarity in the overall trend of the market. Simply put, with the Russell 2000 and NASDAQ making new highs, there is no way the DOW should have been down 8 days in a row.
China’s stock market is down almost 20% this year, Europe has tepid growth and emerging markets are showing large one-day swings in stock prices because of a strengthening dollar due to rising interest rates in the United States. It is only a matter of time until volatility comes home to roost in the U.S. indices. It would be nice to think the USA would be immune to foreign market volatility but we have spent the better part of the last three decades becoming an interconnected global economy. It is simply too late to de-couple.
Let’s not forget the central banks. U.S., Japan and Europe have coordinated the game of suppressing volatility through low interest rates and quantitative easing. The reversal of these policies will likely bring a haircut to stock prices around the globe when optimism rings the bell.
But let’s keep an open mind as stock markets have a mind of their own and look for a break of support levels before throwing in the towel and retrieving the Bear suit from the cleaners. Below is the chart of the S&P 500 ETF. Losing the 200 day (blue line) would be a level to watch for a larger move to the downside.
Chart of the Week!
In the spirit of the World Cup:
Economic & Central Banking Snippets
- The NAHB home builder index in June as the National Association of Realtors (NAR) cites worries about lumber tariffs as a key reason for the decline from last month. “Builders are optimistic about housing market conditions as consumer demand continues to grow.” I’ll add that demand is particularly strong for lower priced homes. “However, builders are increasingly concerned that tariffs placed on Canadian lumber and other imported products are hurting housing affordability. Record high lumber prices have added nearly $9,000 to the price of a new single family home since January 2017.” Let’s not forget rising interest rates are also a factor for this sector. (Boock Report)
- The Bank of Japan (BOJ) is sticking to its ultra-easy monetary policy, keeping its short-term interest rate target at minus 0.1% because inflation isn’t getting close to the central bank’s 2% target. The move contrasts with the ECB’s decision to end its asset-purchase program this year and the U.S. Fed’s steady rate increases, which signaled a break from policies deployed in the aftermath of the financial crisis. (FT)
- The Buenos Aries Stock Exchange’s Merval Index shed 2,491 points to end the day on Monday – down 8.26%. The fall comes after Argentina’s central bank announced it was raising bank reserve requirements by 5% in a move designed to absorb about 100B pesos from the financial system, according to Reuters.
- Calling for investors to “stay calm and rational,” the People’s Bank of China (PBOC) injected a total of about $37B into its financial system after the Shanghai Composite dropped to near two-year lows. According to China’s central bank, this will “ensure liquidity and reasonable stability” amid trade threats from the U.S. It also recommended a reserve ratio requirement cut as mainland companies pledged to stock buybacks to help stabilize equity prices. (Seeking Alpha)
- France’s GDP grew at a slower pace in Q1 with a +0.2% reading down from +0.7% in Q4 of 2017, according to Insee. Household spending growth remained weak while gross fixed capital formation “significantly slowed”. (FT)
- Google will invest $550 million in Chinese e-commerce powerhouse JD.com (JD), part of the U.S. internet giant’s efforts to expand its presence in fast-growing Asian markets.
- After more than a century in the Dow Jones Industrial Average, the industrial conglomerate General Electric will be replaced by pharmacy chain Walgreens when trading begins on June 26. “General Electric was an original member of the DJIA in 1896 and a member continuously since 1907,” said David Blitzer, chairman of the S&P Dow Jones Indices’ index committee.
- China is one of several countries in Asia approaching bear-market territory. China’s benchmark index, the Shanghai Composite, has fallen 19% from its high in January.
- OPEC ministers tentatively agreed to a deal to join other big producers in adding around 600,000 barrels a day of oil to global markets, according to people familiar with the matter. The agreement is in principle only and involves so-called effective barrels—or “real” barrels that will actually hit markets, these people said.
That is all for now until next week’s Market Update. If someone forwarded you a copy of this report, you can sign-up directly at www.kiscocap.com.
Please reach out to me if there is anything you want to discuss about the markets, your portfolio (for clients) or if you would like a copy of the firm’s brochure if you are not a client.
Paul J. McCarthy, III
President – Kisco Capital