The future the market sees
Investors are betting most heavily and consistently on a recovery in US housing and consumer spending.
By Igor Greenwald, MoneyShow.com
Investors typically observe world events to make inferences about trends in asset prices. I think it's sometimes helpful to reverse that train of thought and imagine a world based on market price trends.
This won't tell us what will happen, of course, but it does bring the prevailing expectations into sharper focus. And that in turn informs which near-term data points really matter and which can be safely discounted.
For example, one reason stocks were down again Friday, after a two-day relief rally, was that China's reported GDP growth slowed to 8.1%. The news was taking its toll on the industrial and resource sectors.
We could argue about whether the data have already been contradicted by the stronger Chinese economic indicators for March, or whether the data will give the authorities the prod they need to keep easing lending conditions and curbs on speculation in housing.
But is China what traders have really cared about lately? Not according to StockCharts Technical Rank, which has become my daily go-to guide to the market's gradually evolving assumptions.
It's a straightforward gauge of a stock's momentum over three time frames, measuring rate of change as well as position relative to key moving averages, and weighing the action of recent months a bit more heavily than that of recent days. (You can see the full recipe here.) And StockCharts daily ranks stocks within each of the benchmark S&P indexes for large cap, mid-cap and small-cap stocks, as well as ETFs.
The future these rankings currently describe is one in which a U.S. real-estate recovery has translated into a lending and consumer spending boom, alongside stepped up investment in technology.
Farfetched, I know. It may never happen, given just the known risks like Europe, China, Iran, the cost of oil, and the fiscal drag likely next year in the U.S. (barring a decisive election outcome).
Yet the market has been plotting just such a scenario for months. The two perkiest S&P 500 stocks remain, according to StockCharts, homebuilders PulteGroup (PHM) and Lennar (LEN), notwithstanding the profit taking of the past three weeks.
Then come the growth gorillas: Apple (AAPL), Priceline (PCLN) and Starbucks (SBUX), and then more stocks geared to the housing recovery: Regions Financial (RF), Lowes (LOW) and Sherwin Williams (SHW). More techs, retailers and financials follow those.
Energy and resource plays bring up the bottom, alongside failing retailers like Best Buy (BBY) and Sears (SHLD), as well as former high flyers Netflix (NFLX) and Amazon (AMZN), which simply can't compete with the biggest and best techs on valuation.
Financials, techs and consumer discretionary are also the leadership groups among the mid-caps and the small caps. All this suggests U.S. consumer spending and housing data, which have been notably cheerier than global macro indicators of late, will continue to guide the market in the near term, barring a change in the fundamentals.
With that in mind, perhaps we should be more worried about the selling in U.S. banks, despite results that beat expectations and surprising revenue growth. Or we might, if the strong technical charts of stocks like JPMorgan (JPM) and Wells Fargo (WFC) signaled anything more than routine profit taking.
I saw green on my screen Friday despite a triple-digit Dow loss in stocks such as Expedia (EXPE), Home Depot (HD) and Select Comfort (SCSS). When those stocks start losing their mojo, that will be the time to really worry.
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