- Expectations are a bit juiced for my taste on eurozone purchasing managers index reports. Month-on-month improvement is expected, which seems beyond counter to the negative demand comments on late-earnings-season conference calls. If there's disappointment in these readings, the power of Draghi's comments will be tested.
- Euro risk flare (I know, I know) poised to return with meetings between various European leaders this week. Finance ministers -- those people you are unfamiliar with -- are set to restart meetings in early September.
- One can't deny there are interesting tidbits here that play into the hands of the bulls. From the assorted readings I have ingested, clients are being told to employ "catch up" trades in cyclicals. Since early August, cyclical stocks have outperformed the S&P 500 by 120 basis points, according to J.P. Morgan, and that has the potential to lure in additional fence-sitters and keep the bid under the rally. Oil prices continue to rise even as China's economy has cooled and as officials have dragged their feet with respect to new quantitative-easing measures.
- I suspect the grind higher will persist pending that punch-to-the-gut event, whether it's an underwhelming speech from Fed chief Ben Bernanke at Jackson Hole, Wyo., or something else. Certainly enthusiasm is breeding enthusiasm, and doubt is being pushed aside. That said, watch the action in defensive stocks this week -- for example, in utilities -- in order to see if the market is repositioning ahead of key events in the next two weeks.
Intriguing Things to Know Today
- If we look at price-to-earnings multiples, cyclical stocks trade at a 41% discount to defensive stocks -- the steepest discount in four years, as J.P. Morgan has noted. This is supposed to be a head-nod to cyclicals being undervalued opportunities. However, it could be that race for yield has made defensives overly expensive, while cyclicals are fairly valued to modestly overvalued in a world that is overlooking key second-half fundamental performance risks.
- The jobless rate has been above 8% for 42 straight months.
- This is amazing: Bullish sentiment on Amazon (AMZN) and Netflix (NFLX) has permeated in the face of poor quarters from each company. For Amazon, specifically, the company's love affair with spending has seemingly peaked, and revenue growth will outpace expense growth, thus leading to margin expansion that justifies the hearty valuation on the company.
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