Outside of a 1% slide mid-morning, off of the session’s high which occurred 28 minutes into the session, U.S. stocks held in a tight to the cut line – the opening price.

The three major indices all closed up slightly for the session, but mids and smalls failed to participate.  Small cap stocks, whether measured by the Russell 2000 or the S&P 600, lost more than 1%. 

Technology, utility and consumer-staple stocks led the gainers, while basic material (ending a four-session rally), industrial and health-care shares were the worst-performing groups. 

This is a really strange market, I keep saying this and anyone paying even remote attention undoubtedly understands it.  Beyond the fact that we revisit the same numbers time and again, we see no direction with regard to sectors.  When you’ve got two of the three main areas of safety (utilities and staples) mixed in with tech as the best performers, yet the third (health-care) was accompanied by basic materials as the worst yesterday, you know things are wacky.  It’s hardly a one-day event either as this is the case on many occasions, high cyclicals moving in the same direction as the safe havens.  My feel is that the areas of safety will begin to outperform, but it’s very difficult to have conviction right now.

Market Activity for July 12, 2010

ECRI Weekly Leading Indicators Index

Last week’s economic indicators reading from the Economic Cycle Research Institute (ECRI) fell to -8.30 from -7.60 in the previous week.  That means the index fell at an 8.30% annual rate.  We’re getting dangerously close to the wicked reading of -10.

For new readers who may not be familiar with this index, here’s the run down:

I’ve been posting the weekly leading index out of the ECRI lately, as the measure took a dramatic turn for the worse in the final week of May. When the index hits -10 it has predicted every recession since 1970. It doesn’t always take -10, as was the case for the 1982 recession (yellow arrow) but when it does, heads up.

We may escape a -10 reading on this indicator and we may even escape a technical recession 2-3 quarters down the road.  But it doesn’t much matter whether we record negative GDP readings shortly down the road or muddle around at a 1.0%-1.5% rate of growth.  This is nowhere near trend growth, and completely insufficient for the escape velocity we need to get the jobless rate back to even 8.0% a year hence, much less something close to the long term average of 6.0% within a couple of years. 

This Week’s Data

The key data releases of the week will be today’s NFIB gauge of small business optimism (June), retail sales (June), business inventories (May), jobless claims (last week) industrial production (June) and Empire survey & Philly Fed (both for July).

On NFIB, it will be important for the National Federation of Independent Business’ gauge of small business confidence to show additional improvement.  The gains have been very slow in coming, as the index remains just above the 90 mark – a recessionary level and it took longer than any time in the survey’s history to rise above.  Small business confidence is key to job growth.

On retail sales, the market will want to see a bounce after May’s 1.1% slide.  I think the results will be weak, whether it’s slightly up or down doesn’t matter.  Reality is that we’ll see these retail figure wane and go into a prolonged period of weakness if substantial job growth fails to occur.  The figure had been boosted by government transfer payments, the arrival of homebuyers’ tax credits, delayed foreclosures (delinquent borrowers have remained in their homes rent free for as long as 12-18 months in some cases) and pent up demand within the more affluent consumer segment.  Now that that which has fueled spending is on the wane, retail sales results will respond accordingly.

On business inventories, we’ll watch to see if the sales data declines, which was the case on the wholesale level.  If it does, economists will watch this data acutely in the months ahead, and they’ll be adjusting growth forecasts down if a trend occurs.

On jobless claims, same as always as we wait to see a move to the 400K mark, as it must get below that level to signal meaningful and consistent job growth is on the horizon.

On IP, the figure is expected to post its first negative reading in a year.  If it does, the market is not likely to respond kindly.  Utility production had to be huge in June with the higher than normal temps and if the overall reading goes negative evens so, it means manufacturing production was weaker than the ISM figures have portrayed.

On Empire and Philly Fed, these are the first regional factory activity readings we receive for July.  I’m not expecting substantial weakness to occur until September, they should stay in expansion mode but the sector is showing signs of deterioration. 

Futures

U.S. stock futures are up pretty big this morning (taking a never mind attitude to that ECRI figure) , so we’ll see if the market can hold on to what looks to be early-session gains. 

European bourses are rallying roughly 1.5% across the board, looks like a successful Greek bond auction is what juicing things over there – even though we’re talking six-month paper at about 5% (I don’t see how the Greek government is going to really manage their deficits by having to roll every six months, but of course they don’t like the 5-10 year rates the market is imposing). 

However, Asia traded lower led by the Shanghai Composite, which lost a little more than 1.5%.  Watching Asia is much more important that Europe right now.  Why? Because the euro zone is extremely dependent on Asia and as the Chinese grow more concerned about their housing bubble and tighten lending further (which is the concern that sent those shares lower) Europe will feel it – and they’re already going to feel public-sector austerity plans if they actually do something substantial in this regard. 

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900