Bullish sentiment cooled a bit w/o/w as II said Bulls fell to 51.9 from 56.3 last week with the Correction side again getting most of the shift as they rose to 29.8 from 26.2. Bears were up by .8 pt to 18.3 and continues to sit at the 17-18 level and at this range still below 20 they might as well live on another planet. Me included on US stocks (but I remain bullish overseas). Bottom line, ever since the Bull side reached its highest level in 30 yrs on March 1st, the day after the Trump speech to Congress and which happened to be the all time high close in the S&P 500, all we’ve done is essentially chop around as the bull boat got overloaded. Thus, from purely a sentiment standpoint, I believe we would need a further draining of the bulls in order to create a contrarian set up for another rally. Until then, we either continue to churn or trade lower until we get that sentiment shift.
Also, while we’re in the midst of earnings releases for the next few weeks and digesting weak economic data, I’ll say again that the stock market overall is mostly trading on hopes for tax reform at the same time monetary policy is now a headwind (remember that stocks rose about 10% last year while earnings were flat and ended the year no different than how they finished in 2013). The monetary factor and questions on tax reform have made this market a two way street again which is clearly apparent in the dispersion between industry groups and stocks within. Long/short works again. Thus, earnings do matter but on a stock specific basis right now rather than on an overall index level if that makes sense. Lastly, we know valuations don’t matter until they do and now with monetary policy globally going the other way from what investors have been medicated on for the past 10 years, I argue they now matter, big time.
After touching the highest level since June last week, mortgage applications to buy a home fell 3.4% w/o/w and are now down 1.1% y/o/y as we are deep into the important spring time period where about half of all the years transactions take place. I’ll wait a few weeks of more data before I start drawing any conclusions. Refi’s were basically flat for the 2nd straight week but are still down 42% y/o/y. Coincident with the decline in Treasury yields, the average 30 yr mortgage rate fell 6 bps to 4.22%, a 21 week low. They however remain 40 bps higher y/o/y and hence the refi drop. It’s amazing that a modest rise in mortgage rates can lead to a collapse in refi’s but that also tells you that there aren’t many homes left to refi at these historically low rates.
We were reminded again one of the factors that has helped the euro from breaking below the $1.00 that so many have been expecting for years and that is their trade surplus. While somewhat dated, the eurozone trade surplus was 19.2b euros in February, above the estimate of 18b and up from 15.7b. The peak in this cycle was back in May 2016 when it touched 25b. In the mid 2000’s it never got above 8b and spent time in deficit. Exports are just off the recent high seen in December. The euro is little changed after yesterday’s almost 1% rally on the heels of the British pound spike. I still like both currencies but of course the Sunday French vote could change things for the euro. While Le Pen and Melenchon want out of the euro, in a poll last month 72% of the French want to keep it.
Quietly the Shanghai composite is down for the 4th straight day and by 3.2% during this time period. It’s now trading at the lowest level since early February. This action is certainly part of the whole unwind of reflation bets and comes with another overnight decline in iron ore prices which is trading at the lowest level since October. I want to remind people though that industrial commodities bottomed in January 2016 and have rallied since mostly because of the supply side of the equation as we saw a collapse in mining investment globally and promises from the Chinese that they would dramatically cut capacity in a variety of materials. Some of those promises were kept in China, others were not but the oversupply in many commodities diminished sharply. I include a chart of the Journal of Commerce index that shows prices still near two year highs. Yes, focus on the demand side and the Trump trade certainly helped since November but the supply side matters too.
The FT today reported Part 2 of its interview with Treasury Secretary Steve Mnuchin and he further tried to back track the Trump dollar comments. The FT reported that he “rejected the idea that recent complaints by Mr. Trump about the strength of the dollar were an attempt to talk down the US currency. ‘Absolutely not. Absolutely not,’ “ he said. Mnuchin is trying to put the toothpaste back in the tube. Good luck. The dollar index is sitting at the lowest level since mid November and is below where it was in March 2015. Also I’ll repeat again that negative real rates don’t help either. The day after the Fed first hiked rates in December 2015 the REAL 5 yr yield was +.50%. Today it sits at -.16%. Gold was $1055 on that day in 2015 vs $1284 today. https://www.youtube.com/watch?v=DOFAnpb8I3E