Sunday, April 29, 2012

To Sell or Not To Sell In May?

I have been absolutely torn apart by the latest weak econodata vs strong earnings. I am sure I am not the only one.

So we had another weak econodata point on Fri: 1Q2012 Adv GDP came in below the expectations. While many quickly discounted the headline number on the basis of lower govt vs higher consumer spending (thus assuming 70% of the economy is doing OK), I would like to remind them that consumers are only as strong as the employment can allow, and the latter has been disappointing on consistent basis lately. As the matter of fact, weekly unemployment claims are starting to resemble 2011.

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Next week we will get April NFP and chain store sales. If the employment report is weak, and if we see a m/m slowdown in retail, due to post-Easter malaise, then Q2 consumer spending may take a hit and selling in May could get much more enticing.

click on chart to enlarge

Another strong contributor to 1Q2012 GDP was new construction. While housing has been consistently subtracting, it added quite a bit last quarter. Warm weather was the culprit. But the last reports on new construction may cool down the enthusiasm (pun totally intended). New housing starts hit 5-month low, and new home sales hit 4-month low in March.

click on chart to enlarge

If retail sales and new construction take a dive, there will be no reason to think that 2Q2012 GDP will look any better. Stock market will feel the pain...

But wait! Isn't there Fed to save us from possible sell-off? Bernanke is probably filling his helicopter with "transitory" expensive fuel as I type, getting ready to fly cheap money to all those who are waiting with their hands up in the air. Catch as many as you can, QE3 is back on the table after Q1 GDP miss. Expectation of QE is evident in the dollar index vs gold chart since the FOMC statement on Wed.

click on chart to enlarge

And how about the upwardly revised 2012 GDP projections, brought to us by friendly confused Fed staff, which kept Chairman's itchy QE3 finger at bay? Not even unseasonably warm weather helped U.S. Q1 growth to hit expectations. This makes one wonder what Q2 will look like, since all we hear is how retail sales and new construction were pulled forward.

And then there are earnings... Let's just say that had it not been for drastically lowered expectations for 1Q2012, we would be pushing 1300 and not 1400 on SPX right now. Q2 and full year guidance is another question. It has not been very buoyant, to say the least. Are companies setting us up for yet another underpromise/overdeliver quarter?

Based on the above we have dueling trading scenarios going forward. I have absolutely no idea which side wins the fight, but intend to be on the winning side after the move begins. I am OK with missing the first 2-3% from here. Color me neutral in the SPX 1400 - 1410 zone. Next week may just be the battleground for the ultimate "sell in May and go away" decision to be made.

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