Good Evening: Multiple crosscurrents prevented stocks from making much headway in either direction today, with the major averages finishing appropriately mixed on light volume. Negative stories about the banks and their impending need to raise capital clashed with positive surprises from today’s economic data releases. Given that the banks have been the leaders in both directions since this bear market began, the recent underperformance in the KBW bank stock index may portend a downward resolution to the sideways range the averages have been in for most of April.
Depending upon the news service one chooses to frequent, the swine flu is either dangerously spreading or is well on its way to being contained. Fearing the former, most foreign bourses were under decent pressure last night, but the stocks and bonds in the flu epicenter of Mexico were actually higher at one point today before finishing with modest losses. Perhaps the safest thing to say about this story is that it’s too early to really know whether this strain of swine flu can spread as rapidly around the globe as has the media hype surrounding it. In any case, U.S. stock index futures were down 2% or so as Tuesday dawned. That the Wall Street Journal ran a story about some major banks needing more capital probably also contributed to the early weakness (see excerpt below).
Yet, for the second day running, U.S. stocks suffered only half as much damage as the futures had been indicating. Some analysts take this action as a sign of latent buying power on dips in equities, but a better explanation (at least for today) lies in a piece of less negative than expected news on the housing front (see below). The S&P Case Shiller home price index, released 30 minutes prior to the commencement of trading, showed metropolitan home prices slipped 18% in February versus the negative 19% reading in January. Some tried to herald this better than expected data point as evidence that home prices are bottoming, but, as anyone with a “for sale” sign in their front yard can tell you, a slower rate of decline in price is cold comfort for those trying to sell a home.
After dropping approximately 1% just after the opening bell, equity prices were already on the comeback trail when the next economic news items hit the tape. Consumer confidence in April jumped to 39.2 from March’s 26.9 reading, the largest such rise in three years. Since most of the gains came from the “future expectations” aspect of the survey, economists were quick to hail the results as indicative of a pick up in consumer spending. I’d be happy if the vaunted U.S. consumer somehow found a way to climb up off the canvas, but taken in the context of the whole data series, a reading of 39.2 is not exactly bullish. Consumer confidence was in the 40s back during the dark days of last November, for example, and readings around 110 were not uncommon back in early 2007. Thus, while 39.2 may not be a great number, it was good enough to push stock prices into positive territory today. This happy economic backdrop was only reinforced when the Richmond Fed reported that manufacturing in its district declined at a pace that was gentler than had been forecast.
The major averages responded well enough to these data points to stay mostly above the unchanged mark. Helping to hold prices in check, however, was a follow up to the Journal’s story about the capital needs among the major banks. According to FBR, which administered its own, slightly more rigorous version of the government’s stress test on these institutions, said that Bank of America may need as much as $70 billion in fresh equity (see below). In a further blow to Ken Lewis and his directors, CalPERS announced it was voting against Lewis and his BOD slate at the upcoming annual meeting. BAC shares declined, as did those of Citigroup and other financial companies.
Despite these concerns, equities enjoyed an afternoon rally that saw the major averages logging gains of 1% or more. But this strength didn’t last and prices fell back at the closing bell. The final tally was mixed, with the Russell 2000 sporting a gain of 0.7%, the NASDAQ giving back 0.33%, and other averages finishing with fractional losses. Call today a draw. In contrast to the lack of volatility seen at the NYSE, the Treasury market saw plenty of it. Government bonds were down across the board, and yields rose between 5 and 14 basis points in a decidedly steeper curve environment. The dollar responded by dropping 0.7%, but, like equities, commodities were mixed. Other than a decent drop in metals both precious and base, most sectors comprising the CRB were trendless as the index itself dropped just less than 0.5%.
By almost any measure, fundamental or technical, the U.S. stock market looks to be a bit confused. Biding their time and waiting for more information, prices are thus moving sideways. The economic data has indeed seen some green shoots emerge, but it seems too early to tell whether these growings will become either flowers or weeds. The economic data and corporate earnings have been mixed, and about the best one can say about them is that the rate of decline is slowing. Given the Herculean efforts by the Fed, Treasury, and Congress, such an outcome, while not pre-ordained, is not surprising. The question before investors is whether this “less bad than expected” news flow is enough to signal the type of change President Obama promised when he was swept into office.
I’m no expert, but looking at the internal indicators of the market’s health, it’s just as hard to use technicals when trying to pinpoint an imminent trend in stock prices. The plunge into the early March lows and subsequent rebound into April has left the averages trading sideways at levels just below where they entered the year. Volume and volatility have both eased, and while the lows on the chart are rising, so too are the highs falling. One gets the sense that the indexes are coiling and ready to break out from their recent mid point at 850 or so in the S&P 500. Both the bulls who’ve declared a new bull market and the bears who are selling into what they perceive to be a bear market rally have both been disappointed of late.
Divining a directional change in market prices is tricky, even foolhardy, but perhaps the market leadership names will be instructive. Ever since the great bear market of 2007-2009 began, it has been led by the financial stocks. No matter which direction Mr. Market has chosen to wander, it has been the KBW bank index that has fallen hardest or soared the most. Falling more than 85% into March, the BKX rose just over 100% into mid April. But, while the other averages have been marking time, the BKX is now down 16% since its April 17 high. No matter what our government says about the true health of bank balance sheets, the real stress test for the U.S. stock market lies in what happens next to the BKX. I have a feeling the major averages will start following the banks should they continue moving lower, but who really knows? The safest prediction I can make is that the S&P 500 won’t be hanging around 850 much longer.
– Jack McHugh
U.S. Stocks Retreat, Led by Banks on Balance-Sheet Concern
U.S. Economy: Consumer Confidence Leaps, House-Price Drop Slows
Bank of America’s Lewis Loses Calpers Support, May Need Money
Fed Pushes Citi, BofA to Increase Capital
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