Consumer Confidence at 125...are you kidding me?
The Conference Board's Consumer Confidence index for the month of March was reported on Tuesday to be 125.6! If I recall, this index bottomed out near 20 as the stock market was making what we now know as a generational low in 2009. I started to type that the March reading was the highest I've ever seen, before noticing that it printed a 128.6 at the end of 2000. In all fairness, I was a clueless college student in 2000 so even if it happened, I probably didn't actually see it.
The premise behind this index is that consumers are feeling emboldened by a positive view of business, labor market conditions, and the overall economy. On a side note, the survey responsible for this index was taken before the failure of the health care reform bill. Nevertheless, it is clear that consumers are feeling good and as a result, they are putting money to work in the stock market.
If you look at a long-term chart of the Consumer Confidence index, it almost identically coincides with the direction of the stock market. With this in mind, there could be some red flags waving. In the past, we've seen major tops and bottoms in the stock market at times in which the Consumer Confidence index is at extreme highs and lows, respectively. Particularly readings in excess of 100.
For instance, the last time the Consumer Confidence was this high in 2000, the S&P peaked dropping 50% over the next two years. Likewise, the Consumer Confidence was near 110 in 2007 just before the S&P fell 60% in the subsequent two years. Since the election, we've seen the Consumer Confidence index breach and hold above 100 for the first time since 2007 (and prior to that the early 2000s). Will this time be different?
*It is only fair to note that the Consumer Confidence hovered above 100 in the mid-2000s for quite some time before the stock market rolled over and during that time stocks rallied nicely (until they didn't).
A healthy jobs report, a potential Dodd-Frank peel back, and renewed talks of tax cuts propelled markets higher.
Financial futures traders loved Friday's events and they expressed that sentiment by buying into US assets. For the first time in a LONG time, the jobs report was judged by its merit as opposed to the anticipated reaction by the Federal Reserve. In other words, the markets no longer seem to be held hostage by the Fed's every move. Instead, investors are looking to speculative economic growth as the driving factor with the Fed's monetary policy as a secondary concern.
Non-farm payrolls grew by 227,000 in January but the good news was slightly dampened by sluggish wage growth. On a positive note, the unemployment rate ticked higher to 4.8%. No, that isn't a typo...a higher unemployment rate is a positive. The increase in the unemployment rate is a sign that the labor force has increased. In short, some of those who were discouraged from looking for work have found a reason to get back on the job-hunt (remember, the headline unemployment report fails to recognize those who stopped looking for a job out of frustration but are still unemployed).
The Fed is as hawkish as they've been in years...
A hotter than expected inflation reading and more confirmation from the Fed that they will be seeking at least three rate hikes this year set a negative tone for Treasuries. However, the same news was seen by stock trader as a sign of economic growth and prosperity. Accordingly, the seemingly never-ending stock market rally logged another session of buying. What can we say? This is a bull market...and nothing can derail it. In recent weeks we've seen chaos in Washington, riots in the streets of our cities, a North Korean missile headed for our shores, but we've yet to see investors interested in taking profits in the equity markets.
If you ask me, the bulls are starting to get greedy (that said, we've obviously been wrong about the strength of this rally). According to our friends at Consensus, their bullish sentiment index has reached 76%. Generally speaking, this signifies an extreme that often results in a reversal. Likewise, The AAII Index suggests only 25% of those polled were bearish the market. The bus could be getting full...and we all know that that means.
The ES bears have a slight edge, but they need to move fast.
The S&P has gone into correction mode but the selling has been tepid. The complacent bulls haven't been given a reason to second-guess their bets; if the bears want to make progress they will want to see something happen sooner rather than later. The longer prices hover in this area the more likely the edge will shift back to the bulls.
The meaningful economic reports and the bulk of corporate earnings are behind us. From here, the market will have to find a way to stand on its own two feet. In our opinion, the legs of the bull are a little shakey. Assuming we don't receive any surprise tweets or trade tariff resolutions, the ES should creep into the 2780ish area and Treasuries should begin to make their way higher.
Energy stocks have likely been holding the market up.
Crude oil, and now natural gas, have made impressive moves higher. As a result, energy companies making up a significant amount of market capitalization and playing a big role in the US economy has been positive. Nevertheless, if crude oil prices come back to reality ($50s?), that will work against stocks.
In our view, the oil market is an accident waiting to happen. A few weeks ago we wrote a piece suggesting the intermediate-term top in oil would likely be somewhere in the mid-to-low-$70s and we still feel that way. Speculators are overly long, seasonals are starting to turn bearish, and the market has probably over-priced supply concern risk premium. Lower oil will likely translate into a lower S&P 500.
We aren't ultra-bears in the stock market but we do think the easy money on the upside has been made. The market looks and feels tired, the weekend trade news celebration was short-lived, and we are seeing trading volume disappear as we head into the summer doldrums.