(By David D. Moenning) Good Morning. The recent correction in the stock market has been attributed largely to returning concerns about the state of the European sovereign debt crisis as well as a general softening of the economic data here in the U.S. While just about every report to hit the tape in the first quarter was better than expected, since then, it appears that the economic momentum has begun to fade. And in short, this put a fairly large dent in the BTE theme. As a result, some of the exuberance was removed from stock prices.
To be sure, many analysts and managers had been caught off guard by the BTE phase, which propelled stock prices higher than most anyone was projecting as the year began. In fact, as the first quarter came to a close, the S&P 500 had already met or exceeded the projections that Wall Street's best and brightest had offered for calendar year 2012. Some of the red-faced managers who were missing the joyride to the upside blamed the weather as one theory making the rounds regarding the better than expected economic performance in Q1 had to do with the unseasonably warm temperatures seen in the late-winter/early spring.
In addition, the fact that Mr. Bernanke has continued to state that the Fed stands ready to provide more monetary stimulus (aka another QE fix) if the economy's performance begins to falter left many investors wondering if perhaps the FOMC knew something they (and the market) didn't. So again, this uncertainty about the state of the economy may have caused many investors to back away from their bullish stance as Q1 drew to a close.
However, it occurred to me last evening while flying across the Atlantic that yesterday's ISM report may have put BTE back in the game. As Goldman Sachs (GS) Chairman Lloyd Blankfein stated this week, the biggest risk for those investors seeing the glass as half empty is if things actually go right this year. And from where I sit, the ISM report may have been an example of things going right.
The bottom line is the ISM report was BTE across the board. The overall index, which is designed to indicate the health of the manufacturing sector, came in better than expected at 54.8 (the consensus had been for a reading of 53). In addition, the New Orders component was reported at 58.2, which was well above last month's 54.5. Next, the Employment component was also ahead of consensus at 57.2 versus March's 56.1. And while not an outright "beat," the Prices Paid component index (a measure of inflation) held steady at 61, which, if you are a Fed-watcher, is also a good thing.
Although this is simply one report, I might also add that unlike so much of the data coming out of the government, this one isn't distorted with all the seasonal "stuff" that can dominate reports such as Nonfarm Payrolls.
Don't get me wrong, I'm not saying that this report changes everything. I'm not saying that the ISM Manufacturing report will put the ball back in the bulls' hands or that the market will roar higher from here. And I'm not saying that it is time to jump back into the UPRO's (ProShares UltraPro S&P 500 - a triple leveraged long ETF) or the SSO's. Heck, I'm not even saying that it is time to start buying Apple (AAPL), Google (GOOG), or Chipotle (CMG) again. However, I am saying that one report - specifically, this one report - may be enough to pronounce an end of the corrective phase.
Of course, there are a couple of problems with this view. The first is the simple fact that there is a fair amount of resistance at DJIA 13,300 and S&P 1420. As such, I'm guessing that the bulls will need at least one more round of BTE before they can start doing their happy dance again. And the second is that with the Big Kahuna of economic reports coming out on Friday, a bad number here might just wipe away the good feeling provided by yesterday's ISM numbers. But (and this is a mighty big BUT at the present time), if the jobs report is decent, BTE might just be back on the table.
Turning to this morning... Stock futures are pointing to a modestly lower open at the present time due to the weaker than expected PMI's out of Europe. However, the day will likely hinge on the U.S. data due out this morning and the rest of the week.
Thought for the day... Choose to have a mind that is open to anything and everything...
Wishing you green screens and all the best for a great day,
David D. Moenning