The TSX 60 continues to test support at 900 after a breakout in December 2016. Follow-through below 890 would confirm a primary down-trend. Falling crude oil prices and exposure of banks to precarious housing prices are driving selling pressure.
S&P 500 stays on course
The S&P 500 continues to advance, with a short-term target of 2500*. Bearish divergence on Twiggs Money Flow warns of rising selling pressure. While secondary (medium-term) in nature we should expect stronger resistance at 2500.
Bellwether transport stock Fedex is advancing strongly after breaking out above $200, signaling rising economic activity in the economy.
Stage III of a bull market can last for several years.
The Myth Of The “Passive Indexing” Revolution | RIA
From Lance Roberts at RIA:
While the idea of passive indexing works while all prices are rising, the reverse is also true. The problem is that once prices begin to fall the previously “passive indexer” becomes an “active panic seller.” With the flood of money into “passive index” and “yield funds,” the tables are once again set for a dramatic and damaging ending.
Draining the swamp?
WASHINGTON—The Trump administration proposed a wide-ranging rethink of the rules governing the U.S. financial sector in a report that makes scores of recommendations that have been on the banking industry’s wish list for years.
….If Mr. Trump’s regulatory appointees eventually implement them, the recommendations would neuter or pare back restrictions from the Obama administration, which argued the rules were necessary to guard against excessive risk taking and a repeat of the 2008 financial crisis.
Seems to me like the exact opposite of ‘draining the swamp’. The new administration proposes removing or limiting the rules intended to reduce risk-taking in the financial sector.
This could end badly.
Especially with bank capital at current low levels.
Source: Trump Team Proposes Broad Rethink of Financial Rulebook – WSJ
Steady growth in US hours worked
Growth of total hours worked, calculated as Total Nonfarm Payroll multiplied by Average Hours worked, improved to 1.575% for the 12 months to May 2017.
And the April 2017 Leading Index, produced the Philadelphia Fed, is tracking at a healthy 1.64%. Decline below 1.0% is often an early warning of a slow-down; below 0.5% is more urgent.
Dow Jones Industrial Average continues to advance. Rising troughs on Twiggs Money Flow signal long-term buying pressure.
Dow Jones Transportation Average is slower, headed for a test of resistance at 9500. But recent breakout of Fedex above $200 is an encouraging sign and the index is likely to follow.
We are in stage III of a bull market, but this can last for several years.
Upside Possibilities Look More Likely Than Downside Risks | Bob Doll
From Bob Doll’s latest weekly update:
Investors remain highly focused on global political issues. Emmanuel Macron’s victory in France has reduced some political risk in Europe, but investors are growing increasingly skeptical about President Trump’s ability to deliver on his pro-growth agenda. The growing scrutiny over White House ties to Russian operatives, escalating risks of global terrorism and rising uncertainty around North Korea are all negatives for investor confidence.
But these negatives have not offset positive global macroeconomic conditions. Global economic growth is hardly robust, but looks better than it has in several years, especially in Europe. Manufacturing activity is improving and global trade appears to be recovering. Corporate profits are also trending higher across most markets and industry sectors. Financials remain a weak spot in many areas of the world, but we expect global bond yields will rise as economic growth solidifies, which should help this sector. Finally, monetary policy remains growth- and equity-friendly. The Fed is in the midst of a rate-hiking campaign, but should continue raising rates slowly and predictably…..
S&P 500, Nasdaq, Fedex bull signal
Bellwether transport stock Fedex [FDX] broke resistance at $200, signaling an increase in economic activity.
The S&P 500 followed through above 2400, offering an immediate target of 2500. Recovering Twiggs Money Flow signals medium-term buying pressure.
The Nasdaq 100 has gained more than 20% in the last 3 months, since breaking resistance at its Dotcom high of 4800. With Amazon breaking through $1000, I am concerned that tech stocks are over-heating.
Is the US labor market tightening?
I wouldn’t read too much into weaker US job gains of 138 thousand for May 2017. Job gains seem to be tapering in 2017, with February highest at 232 thousand, but this could also be a sign of tightening labor conditions.
Comments from respondents in yesterday’s ISM report showed hints of a tightening labor market:
- “Business conditions are steady, and with competition increasing, it’s making negotiations even more intense to reduce costs.” (Machinery)
- “Business is booming, and getting direct employees is increasingly difficult.” (Fabricated Metal Products)
- “Difficult to find qualified labor for factory positions.” (Food, Beverage & Tobacco Products)
Unemployment continues to fall, reaching 4.3% for May 2017. The dip below the natural rate of unemployment also warns of tighter labor market conditions.
But there are no real signs of a tight labor market in hourly wages. In fact, hourly wage rate growth in the manufacturing sector is slowing.
Employee compensation as a percentage of value added (Q1 2017) is starting to rise and the percentage of profits (after tax) is declining. The lines tend to invert, with employee compensation peaking and profits dipping ahead of a recession. This still seems 12 months away.
In summary, declining unemployment and rising employee compensation as a percentage of value added both indicate a tight labor market. But soft wage rate growth and falling core CPI suggest the Fed will be in no haste to apply the brakes. At least for the next three quarters.
ISM May 2017 Report
After a setback in April, activity in the manufacturing sector is again expanding:
| MANUFACTURING AT A GLANCE May 2017 |
||||||
|---|---|---|---|---|---|---|
| Index | Series Index May |
Series Index Apr |
Percentage Point Change |
Direction | Rate of Change |
Trend* (Months) |
| PMI® | 54.9 | 54.8 | +0.1 | Growing | Faster | 9 |
| New Orders | 59.5 | 57.5 | +2.0 | Growing | Faster | 9 |
| Production | 57.1 | 58.6 | -1.5 | Growing | Slower | 9 |
| Employment | 53.5 | 52.0 | +1.5 | Growing | Faster | 8 |
| Supplier Deliveries | 53.1 | 55.1 | -2.0 | Slowing | Slower | 13 |
| Inventories | 51.5 | 51.0 | +0.5 | Growing | Faster | 2 |
| Customers’ Inventories | 49.5 | 45.5 | +4.0 | Too Low | Slower | 8 |
| Prices | 60.5 | 68.5 | -8.0 | Increasing | Slower | 15 |
| Backlog of Orders | 55.0 | 57.0 | -2.0 | Growing | Slower | 4 |
| New Export Orders | 57.5 | 59.5 | -2.0 | Growing | Slower | 15 |
| Imports | 53.5 | 55.5 | -2.0 | Growing | Slower | 4 |
| OVERALL ECONOMY | Growing | Faster | 96 | |||
| Manufacturing Sector | Growing | Faster | 9 | |||
Manufacturing ISM® Report On Business® data is seasonally adjusted for the New Orders, Production, Employment and Supplier Deliveries Indexes.
*Number of months moving in current direction.
Notable comments from respondents:
- “Business conditions are steady, and with competition increasing, it’s making negotiations even more intense to reduce costs.” (Machinery)
- “Business is booming, and getting direct employees is increasingly difficult.” (Fabricated Metal Products)
- “Difficult to find qualified labor for factory positions.” (Food, Beverage & Tobacco Products)
Read the full report at ISM May Report
Weekly Investment Commentary from Bob Doll | Nuveen
Key points from Bob Doll’s weekly investment summary:
- We believe U.S. economic growth should rebound in the second quarter and corporate earnings will remain solid.
- Investors remain uneasy about global macro conditions, but we believe the backdrop remains supportive for equities.
- We may be seeing a transition in global equity leadership from the United States to Europe and select emerging markets.
Contrast this with Philip Parker’s outlook at Altair Investments.
Read more at: Weekly Investment Commentary from Bob Doll | Nuveen