Facing formidable resistance and the threat of an ominous triple-top sell signal if bulls lost their battle, U.S. stocks appear to have successfully navigated a critical crossroads by finding the wherewithal to break out to new highs, with blue skies above. Among the ten U.S. business sectors, the performance leaders last week were Consumer Services, Consumer Goods, Industrial, and Financial. Now the question is whether stocks can confirm the nascent breakout in the face of yet another new crop of global and domestic challenges. “Inclement weather†has been both real and metaphorical, and both are impacting the economy.
Internationally, China just reported that their official non-manufacturing (i.e., services) PMI rose to 55.0, which should help alleviate some of the concern about an economic slowdown there. However, after conducting a successful Winter Olympics while preventing a devastating terrorist incident, Russian President Putin has now turned Ukraine’s internal struggle over their future direction into a major international incident. Secretary of State Kerry said that the G8 countries were prepared to isolate Russia economically, including bans of travel visas, freezes on assets, and limitations on trade.
Domestically, the severe weather that has hamstrung much of the country for months has now sucked final holdout California into the maelstrom, with torrential rains and mudslides — as well as powerful waves that did a good bit of damage to some of the popular beachside restaurants here in Santa Barbara.
However, as spring emerges and the clouds clear, there will be a lot of catching up to do, particularly in the housing industry, which bodes well for GDP growth. Also, the Fed remains accommodative, and in fact, with inflation still exceedingly (and for the Fed, uncomfortably) low, there’s a chance further tapering might be slowed until the economy shows it is indeed ready to roll post-winter. Note that Treasury yields continue to fall.
Furthermore, short interest remains high, which has been consistently supportive of the bull market so far. It is reflective of a cautious market that is hedged for downside. Market breadth has been strong. Corporate profits, stock buybacks, and M&A activity are robust, and cash is plentiful. On the other hand, revenue growth and hiring is still slow, stock buybacks don’t boost GDP, and much of the M&A is for intellectual property with uncertain payout — witness the Facebook (FB) purchase of WhatsApp.
The CBOE Market Volatility Index (VIX), a.k.a. “fear gauge,†closed Friday at 14.00. It is way down from the 21+ levels it hit during the extreme market turbulence in early February, yet still above the low levels commonly hit last year, i.e., it has room to fall further. Although most market commentators expect increased volatility this year, the low level of fear has been bullish for stocks. However, if you look at a chart of the VIX, it is in a neutral triangle pattern that soon could break in either direction, but the oscillators are giving no indication which way that might be.
