By David Moenning
Chief Investment Strategist
It was a tough day for the S&P 500 on Wednesday as the blue chip index gave back 1.43%, which amounted to the entire gain seen over the past five sessions. I'm told it was a "90% down day" as down volume swamped up volume by more than 14 to 1 and that the all-important 50-day moving average was breached to the downside. Other harbingers of bad things to come included the Euro (FXE) diving to lowest level in two years, gold (GLD) and the dollar (UUP) surging, commodities (DBC) plunging, the VIX (VXZ) spiking, and the yield on the U.S. 10-year note falling to the lowest level ever. And remember, ever is a very long time.
The data in the U.S. once again showed that the BTE (better than expected) theme that was all the rage in the first quarter is now officially on the run as Pending Home Sales stunk up the joint (this after Consumer Confidence and Case-Shiller had come in on the punk side on Tuesday). And the reports were no better across the pond as confidence in the Eurozone continues to falter (shocking, I know).
Traders with a technical bent are quick to point out that yesterday's action was not good. The chartists suggest that the "retest" (the indices traditionally revisit the lows of a move after meaningful corrections before a real rally begins) is on and that if the S&P breaks through 1292, it might be a quick trip down to 1205. Super.
But never fear bull-campers as we've got a boatload of important data that will hit the tape over the next 24 hours or so including Challenger Layoffs, ADP Employment (private sector jobs), Weekly Jobless Claims, the first guesstimate - oops, I mean, revision - to Q1 GDP, Bloomberg Consumer Comfort, Chicago PMI, HSBC's China PMI (which is usually diametrically opposed to the country's official reading), ISM, and the Big Kahuna - the Nonfarm Payrolls report. And it can't ALL be bad, can it?
Since the primary purpose of my meandering morning missive is to identify the drivers of the market action on a daily basis, the better question to ask at this stage of the game is if any of the above really matters? After all, with Greece's anti-bailout gang gaining ground in the polls, Spain's banks apparently not exactly in great shape, yields rising in Italy, and lots of talk but absolutely no action from EU/ECB leaders, it is clear that the European debt crisis is back.
Sure, the market is not nearly as volatile as last May's Greek drama as I'm told that we have seen nary a single 2% move so far this year in the SPY. And the VIX (so many ways to play this one these days: VXX, VXZ, VIXY, TVIX etc.) is only about one-half the level seen in the summers of 2011 and 2010. But the bottom line appears to be that unless you are willing and able to guess how the market will react to the next rumor or headline, then this market remains VERY difficult.
What about the incessant chant of "QE3! QE3! QE3!" heard emanating from the corner of Broad and Wall, you ask? While Ben Bernanke does seem to be bent on doing everything humanly possible to avoid a deflationary spiral in this country, there are a couple of issues suggesting that those betting on another QE fix may go home with the shakes. First and foremost, there is the issue of inflation. Remember, when Bernanke not-so sneakily mentioned the idea of QE2 from Jackson Hole in the summer of 2010, there wasn't any inflation. And in fact, this point was used as justification for the next trillion dollars worth of bond buying as Bernanke said that inflation was too low. But now inflation is either at or above the Fed's target level. The second problem is the fact that QE has a heavy cost that just about everybody but traders are forced to pay (as in rising food and fuel prices). And finally, the bottom line is that QE hasn't been terribly effective at helping the economy grow.
But again, does this argument really matter? After all, as long as Europe's leadership continues to let this fire burn, there is little doubt that our stock market will struggle. However, rest assured that if and when a credible solution is found, "buy 'em" will be the phrase of the day. And until then, we will continue to search for the things that matter to Ms. Market.
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