Still range-bound. While markets are moving lower in early trading today, this week’s action has been relatively muted compared to the past several months. We remain encouraged by the S&P 500 Index’s ability to hold support and continue to believe that a potential triple bottom is in play, as discussed earlier this week in our Weekly Market Commentary. This retest of the lows is typically an important part of the bottoming process, and the bullish momentum divergence (as measured by Relative Strength Index 14) strengthens the case that the S&P 500 will have another shot at resistance near 2817. In order to finally break out to the upside, we will be looking for strong buying interest in equities, specifically a surge in one-month highs for individual stocks and leadership from more beaten-up, cyclical sectors such as financials and industrials.
Weak foreign data weighing on stocks. Industrial production growth in China slowed to 5.4% year over year in November (below the 5.9% expected), while retail sales also fell short of analysts’ expectations (+9.0%) with the 8.1% growth marking the lowest reading since May 2003. Fixed asset investment was a bright spot, however, continuing its rebound off August lows. In Europe, services and manufacturing PMIs out of France, Spain, and the Eurozone composite all disappointed and come in the wake of yesterday’s European Central Bank meeting in which officials confirmed their intent to end quantitative easing. Overall, the data support our preference for U.S. equities over foreign, however, emerging markets remains attractive despite the lackluster Chinese data as government officials use all tools at their disposal to support economic growth and our expectations for a meaningful trade deal with the U.S. within the next few months supports our positive bias as well.
U.S. retail sales strong. In contrast to Chinese data, U.S. retail sales figures for November rose 0.2% on top of the upwardly revised 1.1% increase seen in October, topping forecasts and pointing to a healthy U.S. consumer. Sales in the control group, a subset used by analysts to gauge underlying consumer demand, coming in at 0.9%, more than doubled projections. The better-than-expected gains may help to alleviate concerns about a slowing U.S. economy given consumer spending accounts for ~2/3 of GDP, and should also keep the Fed on track to hike rates for the fourth time this year when it meets next week.
Worry is increasing and that could be a good thing. There are signs that sentiment is near a washout. For instance, the recent American Association of Individual Investors (AAII) sentiment poll had the most bears since April 2013. Flows saw extreme panic last week as well, as according to Lipper data, weekly outflows of US-based stock funds was an all-time record last week ($46 billion). From a contrarian point of view, this could be a positive for a meaningful low to occur.
- Retail Sales (MoM, Nov)
- Industrial Production (MoM, Nov)
- Markit US Services PMI (Preliminary, Dec)
- Markit US Manufacturing PMI (Preliminary, Dec)
- Markit Eurozone Manufacturing PMI (Preliminary, Dec)
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