U.S. stocks exhibited another day of schizophrenia on Monday, initially shaking off Friday’s sell off to move higher in early trading, only to slide to the session’s low about 90 minutes later, but turned again to end on the plus side – and there were smaller gyrations in between, with the final 45 minutes resembling the activity of a seismograph rather than a typical day in the market; but again, these are not typical times. 

Strong profit results from Halliburton along with a number of acquisitions announced over the weekend certainly helped to turn market sentiment after Friday’s ugly scene; these reports also helped the market ignore another horrible report from the housing sector (we’ll touch on that below).  And traders’ belief that more stellar profit results will arrive later in the week (3M, CAT, IBM, GS, APPL) probably kept stocks from sliding in the final minutes of trading.  (Unfortunately after the bell IBM missed revenue estimates, showing that the profits-by-job-cuts is really all we’ve got right now – revenue came in just 2.5% above last year’s weak results.)

That parenthetic comment is what is holding stocks back right now, creating a scenario in which investors see a market valuation that would normally be viewed as reasonable-to-juicy as something that rather may quickly deteriorate along with profits over the next two quarters.  That is, if firms are unwilling to meaningfully add to workforces, it’s kind of tough for the profit cycle to have durability – yes, 9.5%-10% unemployment does matter.  Corporations can sit on all the cash in the world, but if they believe end demand isn’t going to be there a quarter or two down the road then much of that cash will sit just as fallow as all of those dollars the Fed has pumped into the banking system.

Utility, tech and energy shares led the broad index higher on Monday.  All 10 major industry groups closed in positive territory, but consumer staples, financials and basic material shares were the relative losers.   So the strange commingling continues as utilities (a traditional safe-haven) jumped with tech and energy (two traditional cyclicals). Same was true with the day’s weaklings as consumer staples hung out with financials and material stocks.  Bizarro.   It’s not all that strange, even expected, to see utilities rally; it’s an interest rate thing as the group offers very nice dividend yields.   But it’s the coupling that’s very unusual. 

Market Activity for July 19, 2010

NAHB Housing Market Index

The National Association of Home Builders released its latest look at sentiment among the nation’s home builders, showing it declined again in July.  The reading fell to a reading of 14 from 16 in June, the lowest level since April 2009, reflecting the slide in sales following the expiration of the tax credit.  That reading of 14 was the bounce from the early 2009 all-time lows hit in January ‘09.  To put these numbers in perspective, as if the chart below doesn’t, a reading below 50 shows that more respondents see sales conditions as “poor” than those saying things are “good.”

The sub-index of prospective buyers fell back to a reading of 10 (from 13 in June), which appears to be the post financial chaos floor.  With the number of distressed properties still on the rise within the existing home segment (creating intense competition on the sales front and sending prices below the cost of construction in many cases), one can’t rule out a retest of those all-time lows.

All But -10

The ECRI Weekly Leading Index we’ve been watching since early May, when it took a particularly ugly turn lower,  moved ever-closer to that dreaded -10 mark – a level that has predicted every recession since 1970, which is precisely why we’re talking about it each week.  And the previous couple of readings have been revised lower.

Last week, the ECRI index fell to -9.80 (meaning it is fell at an annual rate of 9.8%), following the -9.10 hit in the previous week (previously estimated at -8.3).  This is the 10^th straight week of deterioration, as it has been slammed from a reading of +12.90 for the week ended April 30.  It had spiked to 27.8 last October, but that was with the help of massive fiscal and monetary stimulus – the former now is on the wane and the latter isn’t providing the same boost to the yield curve as the market drives longer-term rates lower. 

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900