Monday, January 17, 2011

Market Status

A pervasive, overwhelming sense of bullishness has settled over Wall Street. Numerous market observers and analysts are offering up predictions of more rallies yet to come this year.

This is accompanied by market volatility sinking to its lowest level since the summer of 2007: the Volatility Index (VIX) is barely showing a pulse (it has settled in the 15s). In such an environment, it is well known that 'all news is good news'.

Today, Friday the major US indexes started on a sluggish note but developed upside momentum as the day wore on, settling at or near session highs. The Dow and the S&P 500 saw a seventh straight up-week.

Early weakness was attributed Communist China's 50-basis point increase to its reserve requirement ratio, as well as to the news that a number of countries across the world are now grappling with (food) inflation, among them a rapid rise in the UK's producer price inputs. The specter of higher interest rates to cool inflation put pressure on gold and silver, where further downside to the recent slide was added. Strength in the US market was seen predominantly in the bank stocks sector, with the KBW Bank Index up 2.3% to a six-month high. The main catalyst for this upswing was seen in JPMorgan Chase which reported impressive quarterly earnings.

In the US, economic data releases included a 0.5% increase in the December Consumer Price Index (consensus estimate: a gain of 0.4%). When food and energy are excluded from the calculations, the CPI was up 0.1% for the month, thus matching consensus estimates.

Retail sales were reportedly up in December by 0.6% (prior month's increase: 0.8%). When automobile sales are excluded, retail sales were still up 0.5% (consensus estimate: a rise in sales of 0.6%).

The latest economic data also shows that industrial production increased 0.8% in December (consensus estimate: a rise of 0.4%). Finally, January's preliminary Consumer Sentiment Survey from the University of Michigan shows a weaker than expected reading of 72.7 (consensus estimate: a value of 75.5).

The early weakness in US equity futures overnight was in response to the Communist People’s Bank of China raising the reserve ratio effective January 20, one day after Communist President Hu arrives in the US.  Officials confirmed earlier in the month that the Yuan will be revalued 5% against the US Dollar in 2011, preferring to do so sooner rather than later.  So far, the string of  half measures since October has done little to rein in inflation as their peg currency peg has de facto imported Bernanke’s QE2. 

For now, the story remains on the backburner along with the Eurozone debt situation.  Front and center is the US’s own municipal and state budget woes, with Meredith Whitney talking down the sector early in trading yesterday. We had noted the jump in new NYSE 52 week lows, which escalated yesterday.

 Research reveals nearly all the fresh lows going back to November have been in municipal bond funds, so the overall equities structure remains pretty solid.  Not that a risk correction could not ensue off the news or ongoing earnings announcements, but it should be relatively mild and short-lived.  Today Monday, markets will be closed for the US holiday and there are no major economic reports next week, which will culminate with options expiration on Friday.  Absent a string of upside earnings surprises, it will be difficult for the ES to forge material new gains and I would expect sideways to down action at best.

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