/perspectives/weekly-viewpoint/is-buyer’s-fatigue-starting-to-emerge

Is Buyer’s Fatigue Starting to Emerge?

The Dow Jones Industrial Average (Dow) rose 0.97%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM ) added 1.31%, the Standard & Poor's 500 Index (S&P 500) gained 1.19% and the Nasdaq Composite Index (Nasdaq) tacked on 1.72%.

May 13, 2013    |    By Mike Schwager

Performance for Week Ending 5/10/13:

The Dow Jones Industrial Average (Dow) rose 0.97%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM ) added 1.31%, the Standard & Poor’s 500 Index (S&P 500) gained 1.19% and the Nasdaq Composite Index (Nasdaq) tacked on 1.72%. Sector breadth was positive with 8 of the 10 S&P sector groups finishing higher. The Industrial sector (+2.36%) was the best performing followed by Consumer Discretionary (+2.19%) and Financials (+1.98%). The Utilities and Consumer Staples sectors were the laggards, falling 2.74% and 0.19% respectively.

Index* Closing Price 5/10/2013 Percentage Change for Week Ending 5/10/2013 Year-to-Date Percentage Change Through 5/10/2013

Dow

15118.49

+0.97%

15.37%

Wilshire 5000

16925.12

+1.31%

+14.67%

S&P 500

1633.70

+1.19%

14.55%

NASDAQ

3436.58

+1.72%

13.81%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 5/6/13 - 5/10/13

The major market indices finished higher on the week with the S&P 500 and Dow Jones Industrial Average posting new all-time highs during the week.  Despite the positive weekly showing, the rally showed signs of fatigue late in the week, particularly on Thursday when the markets were unable to close higher following the better than expected initial jobless claims reports. The action may be suggesting that markets are running on tired legs and may be on the verge of entering into a period of ‘price discovery.’ This process often results in a sideways slumber as investors try to decipher what is currently priced into the markets and what is likely to develop in the weeks/months ahead. 

The 14%-plus rally since the start of the year has partly been driven by the notion that stimulus junkies will continue to receive additional “monetary morphine” from the Federal Reserve. While the Fed is likely to continue their $85 billion per month quantitative easing (QE) program through at least the end of the year, the recent improvement in economic data is beginning to raise some concern that the program could be “tapered” sooner than what the market is expecting. This thought process was highlighted last week on market chatter of a forthcoming Wall Street Journal article by John Hilsenrath about the potential for the Fed to begin “tapering” QE sooner than expected.  Investors tend to pay attention to Hilsenrath as he is known to have a direct pipeline into the Fed and has been used in the past to “telegraph” their thinking. While the article never surfaced it did have the effect of planting a seed of doubt over the duration of the Fed’s QE intentions.

While I continue to believe the intermediate to longer term outlook remains favorable, the loss of momentum late in the week could signal the early making of the spring pullback that I have mentioned in past editions of the Viewpoint. Markets have gone quite some time without a meaningful (5%-plus) pullback and a period of consolidation seems overdue. Awareness of seasonal tendencies (Sell in May...) have been heightened by the corrections that have developed at similar points over the past three years. While the past three Spring corrections can be partially explained by “other” factors (i.e. Eurozone debt crisis, the lost of the US Triple-A credit rating and fears of a double dip recession), the high levels of complacency (as measured by the CBOE Volatility Index) and the jump in the AAII Bullish Sentiment above its long-term average potentially creates a situation where news flow that goes against the “bullish grain” could catch investors off guard.

While the hangover is never as fun as the party, it would likely be premature to put a toe-tag on the rally in US risk assets.  While periods of consolidation can be very frustrating, we must also be cognizant of the fact that a lot of good news has been priced into the markets over the past few months. Corrective phases are almost like a flu shot – while the shot itself is painful, it is also a necessary evil before the healing process can begin. In other words, the consolidation process—while painful to go through—provides a mechanism to filter out the “weak holders” and “quick money guys” and allows shares to be repositioned to longer term investors at more attractive price points. As such, I would view any meaningful pullback as “healthy” and would view it as an opportunity for longer term investors to increase equity exposure.

The Week Ahead:
First-quarter earnings season continues to wind down with only 11 S &P 500 member companies scheduled to report earnings during the week.  Focal reports include two Dow components; Cisco Systems on Wednesday and Wal-Mart Stores on Thursday. After essentially taking last week off, the economic calendar will be front and center. Reports of interest include April retail sales, the producer price index, the Empire State manufacturing survey, the NAHB housing market index, the April consumer price index, housing starts and building permits, initial jobless claims, the Philadelphia Federal Reserve survey and the University of Michigan consumer confidence survey.  Fed heads will be busy this week with a half dozen appearances on the docket.


Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

The S&P/TSX Composite Index is a capitalization-weighted index designed to measure market activity of stocks listed on the Toronto Stock Exchange (TSX). The index was developed with a base level of 1000 as of 1975.

Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

The individual companies mentioned in this piece were for informational purposes only and should not be viewed as recommendations.

The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. This document contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no gua rantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Information in this report does not pertain to any investment product and is not a solicitation for any product. This material has been prepared using sources of information generally believed to be reliable. No representation can be made as to its accuracy.


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