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Apparently the markets remain convinced that some type of deal will be reached in the Euro zone, as the weekend meetings gave off the impression of progress and safe haven markets to start today are somewhat off balance. However, the size of the EFSF fund doesn’t appear to be overly impressive and it seems as if initial targets for the fund are falling by the way side. Economic news from across the Atlantic overnight showed a slightly better than expected result from a German October services PMI reading, but that was countervailed by a Euro zone October Composite PMI reading that was below expectations and below the growth/no growth line. In fact, the press was fanning the threat of a European recession after the scheduled data release overnight, even though Euro zone Industrial Orders managed a surprising gain for the month of August.
Some traders might suggest that an August Industrial orders reading is an old number and that the Euro zone remains in a very precarious condition. At least to start the new week a number of physical commodity markets are trading higher, equities are attempting to claw out minor gains and the overall view toward the Euro situation is mostly under control. Therefore it is not surprising to US Treasuries starting out unchanged to minimally weaker. The week ahead will be heavily dependant on the Euro summit meeting on Wednesday, but the trade will also see a number of Fed speeches, Treasury supply, Durable goods, Consumer Confidence and New home sales figures and the question of recession or growth will remain a hot button issue.
In the action today, the trade will be presented with several Fed speeches and a Chicago Fed National Activity Index, which might show a minimal improvement from the prior month, but the Activity Index is generally expected to remain in negative ground. At least in the early going today, the markets don’t appear to be paying that much attention to predictions from a US investment banker that the US credit rating was likely to be cut again. Apparently the talk is that the US credit rating cut would come before the end of the year. With little or no progress from the Special Committee on the second tranche of US spending cuts, the US has probably been fortunate that the attention of the markets have been on other events but we aren’t sure how long that attention can be diverted, especially as the month of October comes to an end and the November deficit extension deadline comes into view again. In the mean time, Treasuries look to be influenced by a minor sell the rumor vibe off the Wednesday EU summit promise and the tone of the US scheduled data probably won’t interject that much influence on prices until the summit is out of the way.
The Commitments of Traders Futures and Options report as of October 18th for U.S. Treasury Bonds showed Non-Commercial traders were net short 13,832 contracts, a decrease of 10,686 contracts. The Commercial traders were net long 5,478 contracts, a decrease of 12,972 contracts. The Non-reportable traders were net long 8,354 contracts, an increase of 2,286 contracts. Non-Commercial and Non-reportable combined traders held a net short position of 5,478 contracts. This represents a decrease of 12,972 contracts in the net short position held by these traders. The Commitments of Traders Futures and Options report as of October 18th for US Treasury 10 Year Notes showed Non-Commercial traders were net short 162,075 contracts, a decrease of 21,495 contracts. The Commercial traders were net long 187,524 contracts, a decrease of 35,486 contracts. The Non-reportable traders were net short 25,449 contracts, a decrease of 13,991 contracts. Non-Commercial and Non-reportable combined traders held a net short position of 187,524 contracts. This represents a decrease of 35,486 contracts in the net short position held by these traders.
However, there are indications that growth expectations are moderating, which could limit the outlook in the US and reduce equity market valuations. Many emerging market nations like China and India have implemented rounds of monetary tightening in an attempt to rein in growth and inflation. While some of these maneuvers have already been factored into the market, the threat of reduced growth in these nations could have drastic effects in the US. Meanwhile, the growth in US debt is confronting Congress with the issue of raising the US debt ceiling by the end Q1 2011. With new leadership in the Senate, any increase in the US credit line is likely going to come with reductions in government spending, which raises additional concerns over reduced US growth. Some states have begun to address the spending shortfall, with Illinois hiking tax rates that are likely to slow output by $6.5 billion this year and California discussing spending cuts in the neighborhood of $12 billion.
Given the economic uncertainties facing the equity market today, a number of sentiment readings appear overextended and hint at a near term correction at a minimum. A recent survey from Investor Intelligence showed the percentage of bullish market participants climbed to 58.8% in December, which corresponded to the equity market peak in 2007. It almost seems that markets has factored in a remedy to all US economic ailments and has become extremely complacent, evidenced by an extremely low CBOE VIX Index that bounced along the bottom of the range of the last seven years. Finally, the market is technically overbought territory, with a number of momentum indicators that have failed to confirm the higher index pricing.
Stocks: Optimism Surrounding EU Talks; Positive Asian Econ News
by Dave Hightower on October 24, 2011
Below is a sample of The Hightower Report’s Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!
Global equity markets are on a higher track this morning supported by more optimism surrounding European debt crisis talks and positive economic data out of Asia. It seems the one item agreed on at this weekend’s EU summit was that the ECB would not backstop EFSF funds. The market still wants to believe that European officials are closer to a deal on bank recapitalization and how to leverage EFSF funds. Flash Purchasing Managers’ data out of China broke a 3-month streak of contraction, and that was seen as a positive that helped to rally base metals and resource related shares early this morning. It also helped the Chinese Shanghai Composite Index broke a 4-day losing streak. Favorable export readings out of Japan, on a boost in demand for automotive parts, also lent a positive early morning tone. Meanwhile, interest rate markets in Europe showed a different reaction to yesterday’s EU summit, with German Bunds reversing early morning losses and rallying to new highs on the session. Perhaps some of that early morning reversal came from disappointing PMI data out of Europe. There was also talk from a major Wall Street firm indicating that the US faced another credit downgrade by year’s end. This morning’s US economic calendar presents the latest read on Chicago Manufacturing, which is expected to show only a fractional gain on the month.
S&P 500: The December S&P 500 is on a higher track this morning as it extends last week’s bullish chart breakout to the upside. It seems that the combination of well-received meetings in Brussels over the weekend, along with friendly economic data out China overnight have given the bulls some early morning firepower. However, anxiety is building ahead of a final decision on the European debt situation on Wednesday. This heightened anxiety is highlighted by an index of Greek bank stocks, which plunged by 15% during the early morning hours, fearing a deeper markdown Greek government bonds held in the private sector (haircuts are now ranging from 40 to 50%).With a little more than 20% of the S&P 500 companies reporting earnings, nearly three-fourths have beaten street estimates. Texas instruments reports their quarterly earnings after the bell today, with EPS expected to show about a 20.0% decline from the year ago quarter. The trade is expected to keep a close eye on the earnings for a read on chip demand ahead of the holiday season. The Commitments of Traders Futures and Options report as of October 18th for S&P 500 stock index showed non-commercial traders were net long 5,749 contracts, an increase of 7,523, which represents a change from a net short to net long position. Non-commercial and non-reportable traders combined held a net short position of 11,737 contracts, a decrease of 6,037 on the week. The bull camp holds the cards to start this morning, looking for more bullish confirmation to extend gains out of the past 2.5 months trading range.
DOW: The December E-mini Dow extended Friday’s gains during the initial morning hours and have reached their highest level since August 2nd. The positive action has helped confirm a technical breakout on the charts above the 2.5 month trading range, which would normally give the all clear for a sustained rally higher. However, the reluctance of a number of momentum indicators to confirm the breakout, Euro zone uncertainty and average trading volumes detract from the bullishness. Caterpillar reports earnings before the Wall Street open and is expected to show a 26% gain in EPS compared to the year ago quarter. Probably even more important will be the company’s forward outlook in the face of growing economic headwinds. Meanwhile, the Commitments of Traders Futures and Options report as of October 18th for Dow Jones Index $5 showed non-commercial traders were net long 8,739 contracts, a decrease of 3,476. Non-commercial and non-reportable traders combined held a net long position of 6,681 contracts, a decrease of 1,200 on the week. It is possible that the speculative selling trend during last week’s congestion was probably the result of profit-taking from the October rally. The early edge goes to the bull camp this morning, with potential upside targeting coming in at 12,097 based on the recent congestion pattern.
NASDAQ: The December NASDAQ established a higher high during the early morning hours and sits just 38 points below last week’s high. In addition to optimism surrounding the EU Summit over the weekend, the NASDAQ could be benefiting from news that Google has been out looking for financial backing for a potential bid for Yahoo. The Commitments of Traders Futures and Options report as of October 18th for Nasdaq Mini showed non-commercial traders were net long 37,971 contracts, an increase of 24,457. Non-commercial and non-reportable traders combined held a net long position of 11,749 contracts, which reflects a shift from a net short to a net long position. While the buying trend of the speculators is seen as a positive force, those figures could be overstated, as the NASDAQ slipped nearly 30 points after the report was conducted. The bulls have the early advantage this morning, with key resistance at 2388.50.
TODAY’S MARKET IDEAS: The December E-mini Dow and S&P 500 have confirmed a close above the recent 2.5 month trading range, which on the surface is bullish. It is a step closer in leaving the October low as an intermediate bottom. However, there still remain a number of unresolved issues overhanging the market: US Economic growth prospects and concrete steps to resolve the European debt crisis. For now, both factors have seen some positive press, but more is needed to justify the higher price levels. Sentiment is beginning to flash bearish warning signals, like a put to call ratio that is reflecting excessive bullish optimism. A key theme to watch in today’s trade is for a noted pick up in fund buying interest now that the major indices have broken out of their respective trading ranges. Volume was average Friday, but for a significant push out of the range probably needs to see greater participation. We maintain a positive short-term bias, but remain suspect over another leg higher at this juncture.