May 20, 2016

Stocks opened higher this morning (following Europe’s and Asia’s lead) and erasing yesterday’s losses (Dow + 107 pts; SPX +.7%). Early trading looks to the opposite of the previous session: tech and financials are leading the way, whereas utilities and consumer staples are lagging. To be more specific, semiconductors, banks, biotechs and transports are all up over 1%. Asian market rose .5% overnight and European markets are poised to close up roughly 1.5%. The dollar is flat and commodities are mixed. WTI crude oil is down slightly to $47.80/barrel. Bloomberg reports US crude oil production declined for a third straight month as oil companies continue to cut back spending. Production volume fell to 8.8 million barrels per day last week, and that equates to a 4.5% decline so far in 2016. Bonds are mostly unchanged. The 5- and 10-year Treasury yields are hovering around 1.38% and 1.86%, respectively. 

The market has been trendless lately, causing Wall Street strategists to wonder why. JP Morgan says, “The path forward likely remains range-bound as investors are caught in a tug of war between weak fundamentals and exhausted technicals, on the one hand, and expectations of a more dovish Fed and stabilizing US dollar on the other.”  CNBC’s Jim Cramer has a slightly different take. He says the problem is that the market is like an orchestra with two directors: oil & the Fed. The rise in oil has been good for stock prices, but if it rises too much and results in higher inflation, the Federal Reserve may be forced to raise interest rates more quickly than expected. And higher rates lead to a stronger dollar. That’s likely bad for stocks (in the near term anyway). Finally, Art Cashin of UBS blames some of the market’s skittishness on the Fed’s indirect influence on emerging markets. A stronger dollar is seen as negative for emerging market currencies, and economic growth.   

Existing home sales accelerated in April. The total volume of transactions increased 1.7% to an annualized rate of 5.45 million units. That’s a three-month high. The median home price increased 6.3% y/y to $232,500 (the highest since June 2015). Inventory of homes for sale remains tight, and fell 3.6% y/y. Low inventory is restraining transaction volume a bit, and keeping prices high. The chief economist of the Nat’l Assn. of Realtors says there is “plenty of room to grow” in the housing market. 

Deere (DE) reduced its full-year 2016 earnings guidance. Management said lower farm income is resulting in weaker demand for machinery. Dealerships are seeing higher levels of unsold inventory. In fact, the company predicts that sales of agricultural equipment will fall 20% in North America this year. The Dept. of Agriculture predicts farm income will drop this year to levels not seen since 2002. 

By the way, AAII’s Bullish Sentiment survey, which measure retail investors’ attitude toward the stock market, has fallen back to levels not seen since the correction bottom on Feb. 11th. No one likes this market, which I suppose argues for higher stock prices.

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