What's Down Is Up And Up Is Down, An Interesting Open To May Trade

Originally published by AxiTrader

Market Summary

Tech is outperforming again today with the Nasdaq 100 hitting another record high overnight closing at 6091. The Dow Jones Industrial Average slipped back a smidge and the S&P 500 is again trying to test toward the 2400 high ending the day at 2388, up 4 points.

What’s amazing about last night performance in the US is that president Trump floated the idea of breaking up the big banks but no one cares. Likewise US data was disappointing again and the Citibank economic surprise index has really collapsed now. It printed minus 20.6 this morning.

Anyway the positive tone helped the SPI lift another 8 points after yesterday’s solid 32 point gain. The positive tone also lifted the Aussie and kiwi from forex laggards to forex leaders with gains of around half a percent each. Sterling lost about the same amount as the multilayered resistance above 1.30 and a break of short term trendline point it lower. The yen is weaker as well while euro is becalmed awaiting an expected Macron victory in the French election.

Gold fell below support and sits at $1256, oil is getting hammered again losing another 1% with WTI now $48.75 but copper lifted by 2%.

What You Need To Know (with a little more detail and a few charts)

• S&P 500 +4 (0.17%) 2389 (7.29 Sydney - change since previous day)
• Dow -27 (0.13%) 20913
• Nasdaq +44 (0.73%) 6,091
• SPI 200 +9 (0.15%) 5,945
• AUD/USD 0.7519 +0.53%
• Gold $1256 -0.9%
• WTI Oil $48.74 -1.2%

International

• Donald trump has let the cat out of the bag of bank stocks, and said bank break up. “I’m looking at that right now,” the president told Bloomberg. “There’s some people that want to go back to the old system, right? So we’re going to look at that.” – but no one believes him. And White House press secretary Sean Spicer said the Administration is not ready to roll out Glass Steagall yet.

• That said I thought treasury Secretary Mnuchin telling an audience of bankers at a Milken Institute conference overnight that “you should all thank me for your bank stocks doing better” might be a “tell” that the Administration might be up to something.

• The CBOE Volatility Index index is at decade lows – BUT IN A WORLD OF PASSIVE INVESTING IT IS A USELESS INDICATOR. I say that because, well, it’s coincident at best. If stocks fall the VIX will rise. It has no predictive power at all these days because what active managers do is simply getting swamped by a wall of cash switching to indexing. As I wrote yesterday though – this sets up the salad days for active traders and investors with a solid process.

• But at the moment a low VIX tells you the buyers still have the upper hand in US stocks at present and are betting new record highs are coming. There is no point fighting it in the short term. My trading strategy is either stand aside or get on the train. And when a turn comes my process will try and capture that and ride it down.

Chart

• And why wouldn’t stock traders be ebullient. If US companies can turn awful levels of growth into 12.5% earnings growth year on year – based on FactSet’s numbers – they ought to be giddy at the prospect of further improvement based on the Atlanta Fed’s first guesstimate of Q2 GDP growth. On its GDPNow website the Atlanta Fed said “The initial GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2017 is 4.3 percent on May 1.” 4.3%, BOOM! Now of course if history is any guide this initial estimate will float lower in time. But that is one heck of a starting point.

• That’s optimistic given the data last night. Personal income was a little lower than expected in March at 0.2%, spending was flat against expexctations of a 0.2% rise and the ISM manufacturing index was lower at 54.8 from 57.2 last. The washup is that the US Citibank economic surprise index’s freefall continued as it fell to -20.6 from Friday’s -2.8.

• And on growth treasury secretary Mnuchin said overnight that it could take up to two years for economic growth to reach 3%. Solid earnings are a salve against that being a risk to the market right now as I wrote yesterday in this piece.

• And before I go on growth. I was asked by Bloomberg yesterday in an interview what I though the impact of the better than expected South Korean trade data – particularly exports meant. I noted that many saw South Korea as a canary in the coal mine of the global economy so this was a positive indicator. And this morning I saw Joe Weisenthal show a chart of the relationship between Korean exports and US industrial production. As you can see below there is a reasonable directional correlation. No wonder things perked up in Asian trade and for the Aussie and kiwi after the data yesterday.

Chart

• Elsewhere

• President Trump said – subject to some caveats – he’d be honoured to meet the North Korean leader. No it was May Day not April Fools.

• The French election is still expected to go easily to Emmanuel Macron at 61:39 based on the latest polls. The candidates were taking pot shots at each other overnight. But, the absolute absence of any tightening in this race has given market the freedom to go about their business untroubled by the chance of a surprise.

• In UK politics British prime minister Theresa May mocked the “Brussels gossip” about rancorous talks she is supposed to have had with the EU’s Jean-Claude Juncker over the weekend.

Australia

• The ASX had a cracking close yesterday. I tweeted around 2.30pm that 5950 looked like a bridge too far and left the office to drive home around 3.15-3.30. So I was surprised to see that the price of the S&P/ASX 200 index had rocketed to close the day at it’s high of 5956 and above what had been resistance.

• And as is often the case when you see a move on the ASX that seems a little out of whack it precursed a move in US markets. Which is what we’ve seen last night with the positive tone in US markets.

• Markets, like water, always find the path of least resistance. And at the moment you’d have to be a fool, have huge pockets, or a time machine to go short this – or any other stock market right now. Don’t get me wrong, I’m not suddenly bullish. I’m on the sidelines and happy to wait and see where things travel in stocks right now. But I wouldn’t short the overall market. That wouldn’t be a good risk reward trade right now whatever my rhetorical reservations. I’ll wait for a signal.

• But it’s a different story below the surface of the index – here and across the planet.

• Anyway after yesterday’s 32 point rally SPI traders have marked prices up another 8 points. The break of 5950 will have every man, woman and their dogs looking back to the 6000 level we last traded at a little over 2 years ago. It’s only a hairs breath away now so why not. Then we’ll see.

• And of course today we’ll hear from the RBA. No change in policy is expected but I’ll be watching what the governor says about the outlook for the economy and thus any implications for interest rates very closely. No doubt yesterday’s 0.5% print for monthly inflation data and the solid manufacturing PMI mean the chances of him pushing the door ajar for further easing are remote. But the latest survey by Digital Finanical Analysics shows there is a growing chance of a material increase in mortgage stress across the economy.

• So as APRA and the RBA fight to restrain lending and house price growth that will have a big impact on consumers in the year ahead. My strong belief is that APRA and the RBA have sent a strong signal that will effect the behaviours and spending plans of consumers. That is, households will switch focus from wealth accumulation to debt reduction. And that means that more money will be allocated to saving/repayment and less to spending. That in turns means that – save for population growth – there is every chance that consumption spending flatlines and perhaps goes backwards.

• So maybe I’m early on the RBA and the door ajar to more easings. But I think they should warn that they may need to so the economy can get the stimulus of a weaker dollar without goosing up house prices.

Forex

• After being among the poorest performers in April the Aussie and Kiwi burst out of the blocks on May Day with gains of around half a percent. What drove those moves, in particular, is a little hard to fathom. But they had shown signs of bouncing back from Thursday’s lows and with risk on and no real fresh selling impetus sellers stepped back. So prices rose.

• Elsewhere GBP is showing signs of topping for this run. I was already getting that sense yesterday morning and the break of 1.2890ish seems to confirm that. USD/JPY has taken out resistance at 11.56 and last week’s high at 111.77 and it is a little higher there this morning. Euro is largely unchanged at 1.09.

• Here's a look at the GBP/USD chart and what looks like it might be a turn.

Chart

• Where Forex goes across the rest of the week will very much be driven by the Fed and non-farms.

Commodities

• Oils ain’t oils Sol. Those of you reading this of a certain age may remember the old Castrol ad which sought to differentiate its motor oil product from the competition. I was reminded of this ad as I did my research today and saw that the Saudi’s have again dropped their price for Asia. You’ll recall that last week I reported the first US cargo had gone to Asia, and readers know I’m of the view the axis of power has slipped west from the gulf to the Permian basin and North America.

• So with that in mind and with news Libya is really ramping up production hitting the wires it’s no surprise that oil is down again. WTI dipped 1.1% to $48.78 while Brent fell 1.1% to $51.48. A move back toward the recent low at $47.00/20 seems a real chance as traders test support.

• Oh, and as if to underlie the axis shift Reuters reported this morning that “BP (LON:BP) says 1 bln additional barrels 'possible' in Gulf of Mexico hubs”. How you ask, technology folks, technology.

• Gold had an outside day and is under support at $1257 this morning. Nothing like a stock market rally and a conciliatory-sounding – sort of – US president toward North Korea to knock gold lower. $1253, the 200-day moving average, is the level to watch now.

• Copper defied the weaker Chinese PMI data over the weekend and rose a solid 2% last night to $2.65. That’s broken two trendlines and likely caught a few folks by surprise {puts own hand up}.

Have a great day's trading.