• Weekly Comments for August 1, 2016

    The past week was interesting in terms of economic news, although none that had implications for the US equities market, which stayed flat all week. How could this happen?



    The BOJ disappointed with a market intervention in the low range of what had been expected and at the same time, US GDP also disappointed, leading markets to believe that the Fed would not raise rates in a slowing economy. Let's not also forget the dismal June durable goods report published on July 27. Oil also continued weakening last week, with futures shedding 14% for July alone.

    Poor GDP Figures led to a weaker US$ (more against the Euro than the Yen) and stronger 10Y Treasuries (lower yields.)









    In a non-Nirp environment, expectations for lower interest rates would be supportive for equities. But this time, the implications were a breakdown in the US/Japanese rate differentials combined with a weaker US$, which might force Nirp refugees to rethink their strategy of scooping up dividend-bearing US equities with both hands.

    With less gas in the tank and the main buyer probably slowing its purchases, equities might ease down to the 2120 support level.



    This is also probably the analysis by VIX futures buyers.



    This possible weakness was however not in evidence last Friday, as both the Cumulative Tick and the 20DMF continued to be strong.



    A continued positive Money Flow was also detected on dividend plays such as REITs.



    However, note below that a big push higher occurred in the last twenty minutes of trading, which points to end of month window dressing.



    Reverse repo operations last Friday were also higher than usual. I would point to this as the main reason equities were up despite the weak GDP data.



    I believe the latest much weaker than expected GDP figures could be a major hurdle for US equities. This is somewhat strange since the latest employment Figures (NFP) were so good, but a lower GDP indicates less economic activity, lower earnings and hence lower expected dividends. This of course is all in theory, as corporations can continue buying back stocks with borrowed money.

    Note below that on Friday, the Fed increased its recession probability index to 22.5%, which is rather high compared to past levels... and mostly in regards to high equity prices.



    The latest June data for durable goods orders was published on July 27. This clearly shows a drop.



    In order to adjust for seasonality, I compared below the monthly change year over year (in blue.) For example: the June 2016 displayed data is the difference between the June 2016 and the June 2015 data. The average for the past three months is shown in pink. This line has been basically below zero since December 2014.



    This is also probably the reason the XLI Money Flow has been negative for quite some time.



    Of course, the Money Flow on XLK (Technology) is still well above zero, indicating that tech has attracted much of the money.



    Conclusions:

    The simple money flow logic points to equities pulling back next week. This of course will depend on Japanese pension funds. If they slow their purchases next week, then I believe the poor economic data will weigh markets down.