Equity Clock

Stock Market Outlook for April 13, 2012

Upcoming US Events for Today:

1. Consumer Price Index for March will be released at 8:30am.   The market expects an increase of 0.3% versus 0.4% previous.   Core CPI is expected to show an increase of 0.2% versus 0.1% previous.
2. Consumer Sentiment for April will be released at 9:55am.   The market expects 76.1 versus 76.2 previous.

Upcoming International Events for Today:

1. German CPI for March will be released at 2:00am EST.   The market expects a year-over-year increase of 2.1%, consistent with the previous report.

Recap of Yesterday’s Economic Events:

The Markets

Markets pushed higher for a second day as speculation spread that the Fed would perhaps enact another round of monetary easing following comments from the vice chairman of the Federal Reserve stating “I consider a highly accommodative policy stance to be appropriate in present circumstances.”    As well, rumors of a stronger than expected rate of GDP growth in China helped propel cyclical sectors higher.   The rumors turned out to be unfounded as the whisper number of 9.0% GDP growth was met with an actual result of 8.1%, below initial expectations of 8.4%.   Overall, the anticipation of these events was enough to dislodge weak short positions initiated over the last few days in a typical short-covering rally on volumes lower than the past couple of days.   In the end, the trend for equity markets is still implied to be negative following the break of the positive trend at the beginning of this week.

The S&P 500 traded back above it’s 50-day moving average on Thursday, an important level to determine intermediate strength, however, the Dow Jones Industrial Average found resistance at this level following Thursday’s surge, leaving a key breakdown point intact.   As well, the TSX composite traded back up to the breakdown point at the neckline of a head-and-shoulders topping pattern.   As long as these equity benchmarks fail to break back above their breakdown points, the trend remains bearish, as can be concluded by Thursday’s activity.

In addition to the Dow Jones Industrial Average, bond yields and oil prices also found resistance at the 50-day moving average.   And to cover our basis from stocks to bond to commodities to currencies and beyond, the US Dollar Index and Volatility Index both found support at the 50-day.   Each suggests bearishness on an intermediate time scale, which is likely to lead to a further correction before a sustainable rally materializes.   The correction is likely to remain intact as long as more misses are obvious in economic reports than beats, due to overly hyped expectations.   Thursday’s weekly jobless claims reports was the latest report to miss expectations.   Analysts had expected an improvement in initial claims to 355K, from 357K previous, however claims jumped to the highest level since January at 380K.   Misses such as these have enough power to lead analysts to doubt expectations of economic strength moving forward, thereby “shocking” the market.

A clear way to see the weakness in the market is via the breadth indicators.   The NYSE Summation Index and the NASDAQ Cumulative Advance-Decline line both peaked at the beginning of February, trending lower in a series of lower-highs and lower-lows ever since.   As long as this pattern remains intact, market weakness can be expected.

Sentiment on Thursday, as gauged by the put-call ratio, ended bullish at 0.86.   A certain degree of complacency was clearly apparent during the session as the ratio plunged over 21% from 1.09 in the session prior. 

Sectors that Moved the Market

Thursday was clearly a risk-on day as cyclical sectors significantly outperformed the market, while defensive sectors, such as Staples and Utilities, traded almost flat on the day.   A rebound rally such as this was to be expected given the prompt plunge in equity markets since the month began.   However, until signs of sustainable strength become evident, the conclusion is that this short-covering rally is likely to fade.

S&P 500 Index

Chart Courtesy of StockCharts.com

TSE Composite

Chart Courtesy of StockCharts.com

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