Market Slips on Weak Data

We have recently discussed an emerging trend in the markets - various data points that are showing weaker than expected inflation are also pointing to a slowing economy. Equities have celebrated “bad news” with all of the focus being on the Fed and expected rate cuts - these are viewed as a potential bullish development currently.

In an interesting break from this “bad news is good news” dynamic, the stock market seemed to actually care that recessionary conditions might be showing up. Friday’s price action was highly polarizing, as investors digested below-expectations PCE, which is roughly 70% of GDP growth. The S&P 500 Index was down -0.73% at mid-day, before violently rallying +1.57% into the close and “saving” an otherwise lackluster week for all asset classes.

Regardless of fundamentals, volatile conditions are not unexpected. After all, some managers simply needed an excuse to take profits. SPY had been trading in “Overbought” territory for the past week, losing short term momentum, and appearing to test immediate support. That test came near the 50-DMA for a couple of minutes on Friday, followed by a clear bounce to Resistance (R1, $527). This week, we’ll either get another test, which will result in a downward continuation to $503 (M-Trend, -4.55%) or more grinding-higher price action.

The MACD signal is now suggesting limited upside potential, as the negative crossover works its way to resolve previously overbought conditions. With stock buybacks fully supporting the market this week and the next, we are not expecting anything other than a shallow pullback. Any weakness could be used to add risk exposure opportunistically to portfolios.

Transaction Volume spiked last week, which is a potential issue going forward. Similar patterns of volume spikes with markets retreating from highs have preceded periods of negative returns. This is one of the reasons why we have NOT yet bought the dip - more dipping could follow. This is not overly concerning, but definitely something to look out for and a reason to be patient.

The current consolidation process is mostly running on technical catalysts and supply/demand dynamics, since most earnings-related price moves have resolved by now. Fundamentally, the key day of the week is Friday, when Non Farm Payrolls and the Unemployment rate will be released. It will be interesting to see if weakening consumer data is visible in labor reports as well.

Treasuries have not broken the positive correlation with equities, as would be expected in a “bad news is bad news” reaction. TLT actually underperformed SPY last week (-0.44%) and 10-year bonds (IEF) finished nearly flat. Truly recessionary expectations should have yielded a completely different outcome in this sense. At the moment, the treasury market is holding near recent lows, and an upside break is missing.

Given the trend of the latest readings (also reflected in the Atlanta Fed GDPNow model) we would have expected “more” from treasuries. Incoming data is clearly pointing south, with inflation for the first quarter also being slightly revised down to 3.3%.

Our Trading Strategy

Summer is officially upon us and the market will probably shift down a gear or two up until late August. Absent any dramatic headlines, with corporate stock buybacks in full swing, it looks like we could put our portfolio on autopilot for the next 2 months. This means patiently waiting for the current consolidation process to resolve itself and trade opportunistically in the interim. With portfolios allocated near target exposure, there’s not a lot that can be done at the moment from a macro asset class allocation standpoint. This is neither the time to become exceedingly aggressive by chasing risk, nor is it the time to shift defensive. June and July are historically positive return months with odds of 58% and 51% for a finish higher.

Pertaining to individual positions and sector / factor exposures, we’ll rebalance those in accordance to our weekly Process.

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