"If ignorant both of your enemy and yourself, you are certain to be in peril." -- Sun Tzu
Nothing to See Here
To be sure, some of the data has been better, and those consensus views on first-quarter earnings sure are nice and pretty. There are just a few things that just don't work in my head though; let us proceed. Those March vehicle sales would be one of them. Ugly. Ugly, with a capital U. Now, an annualized rate of 16.6 million wouldn't be so bad, let's say, in mid-2015. Mets won the pennant that year. It is fairly lousy, though, when the market is looking for a number around 17.4 million, and when 16.6 million equals the weakest monthly pace of vehicle sales since April 2015. This not only puts the whammy on the March edition of headline level retail sales, due next Friday, it could mean that people are done for now.
So, just what is going on here? Normal behavior? I don't think so. But then again, I think we left anything resembling normal behavior behind us a long time ago. On Friday, the Bureau of Economic Analysis told us that consumer spending barely budged in February for the second month in a row, despite increased personal income. This Friday, "Jobs Day" data will steal the headlines and market sentiment for the day. However, late in Friday's session, the Federal Reserve will release February consumer credit growth, which for January showed a gnarly contraction in the use of revolving credit (credit cards). Does last week's roaring consumer cConfidence tag smell right to you? Let's explore further.
William Dudley, president of the New York Fed, was out and about yesterday. Now, Bill Dudley has been a proponent of rate normalization, mind you. Dudley spoke on student loans and household debt. In the fourth quarter of 2016, the rate of seriously delinquent student debt rose to an alarming 11.2%. To be classified as seriously delinquent, debt must be at least 90 days behind. That standard also places 7.1% of credit card debt in the seriously delinquent category. Oh, by the way, delinquent auto loans are at eight-year highs, totaling $23.27 billion despite those loans generally having interest rates attached that hang just above zero and terms that stretch the payments out over five, six or even more years.
By all means, go ahead, Bill. Normalize rates before taking care of the balance sheet. Use inflation as cover to do whatever it is that you have to. Core CPI hasn't budged in over a year. Energy prices, they only matter when you need them. Got it. Nothing to see here.
The U.S. dollar continues to increase in value vs. its peers. A British pound will buy you just under a buck and a quarter. The euro is closing in on a buck and a nickel, when it looked to be closing in a buck and a dime just a few days ago. Treasuries are bouncing around at yields now close to five-week lows, with 10-year paper now giving up 2.33%. Gold? The yellow stuff is now trading at the critical $1260 level. A crack of this level and a hold that survives at least one test would be significant. Keep in mind that this strength in gold has come on parallel dollar strength. A little dollar weakness coupled with the just-mentioned technical break could easily put gold at $1315.
As for equities, the energy sector has started to show some life, as WTI crude has put up a legitimate fight just above the $50 level. Over the last five business days or so, the sector is out-performing all others, led by such perennial under-performers as ConocoPhillips (COP - Get Report) and Chesapeake Energy (CHK - Get Report) . The first, for intelligently finding a way to unload some "expensive to develop" oil fields, and the second for positive analysis that hit the tape in response to deregulation, an improved balance sheet, and improved production technologies.
The other sector to watch is neither that of the tech nor discretionary sectors, which have both done well this year based on expectations of future growth. It's utilities. These stocks as a group have barely market performed, but with the peripheral financial universe migrating into safe havens, and at least for now, interest rates migrating lower, this group becomes more and more attractive.
What does the two-fisted, careful trader do in response to this changing environment? I don't know, but I can tell you what I do. I start out well-diversified, so it is at times like this that my bond portfolio and my allocation toward gold earn their place at my table. I'm still long the discretionary space. I haven't fled the airlines since buying on the dip. I already took profits, and then got back into the banks, greatly reducing forward-looking risk, but still exposing myself to the potential that I believe a rising interest rate/pro-growth environment would unleash on that group. Oh, and at least for now, I'm staying long energy. I commit to nothing. I fall in love with no method. This is your money. Loyalty earns you nothing.
08:30 - Trade Balance (February): Expecting $-46.5 billion, January $-48.5 billion.
08:30 - Exports (February): Expecting $192.5 billion, January 192.1 billion.
08:30 - Imports (February): Expecting $239 billion, January $240.6 billion. January brought us the most decisively negative trade balance since March 2015. Expectations are for some improvement in February, as the goods portion of the trade gap is already in much better shape than expected. The U.S. regularly runs a net surplus on the cross-border trade of services. This item will not have an immediate impact on the marketplace.
08:55 - Redbook (Weekly): Last Week 0.6% y/y. This weekly measure of chain store health continued to grow on a year-over-year basis last week, albeit at a pace slower than we had recently become accustomed to. On a monthly basis, the data showed contraction again as well, which has become the norm. I don't think this item has the impact on the retail industry that it used to, perhaps due to the fact that investors have, at least for now, largely fled the industry.
10:00 - Factory Orders (February): Expecting 1.0%, January 1.2% m/m. February durable goods orders bested expectations at the headline level two weeks ago. This has pushed higher expectations for this item that combines durable goods orders with non-durable goods. Should this come to fruition, that would be two strong months back to back, and three out of four.
16:30 - Fed Speaker: Federal Reserve Gov. Daniel Tarullo will speak from Princeton, New Jersey. Tarullo will take questions from the audience, but his words will not likely impact the marketplace. Though his position holds a permanent voting slot at the FOMC, Tarullo retires tomorrow and will not vote on policy again.
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.
SPX: 2376, 2370, 2362, 2352, 2345, 2337
RUT: 1389, 1380, 1373, 1366, 1358, 1351
Tuesday's Earnings Highlights (Consensus EPS Expectations)
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