Jun 15, 2005

Bad Reaction

I wrote last week that I thought we were headed for a decision point and today looks like it. I am not doing a lot but am positioned for April's downtrend in equities to resume. My reaction to yesterday's economic releases is best captured in David Altig's quote from Reuters:
U.S. retail sales staged their sharpest drop in nearly a year in May while producer prices showed the biggest decline in nearly two, according to government data on Tuesday that may ease inflation fears but show consumers may be faltering.
I have been thinking a consumer slowdown or at least the fear of one was on the horizon so maybe I am just fitting the data to my view but it does not seem unreasonable. The CPI number this AM is also consitent with the idea that the worry going forward will be slack demand.

While commodities and their producers have managed a bounce the transports don't seem to be tagging along like they did last year. Norfolk Southern (NSC) and FedEx (FDX) stand out for their weak patterns. Last year the transports stormed higher through 9 months of market weakness and I repeatedly heard the reassurance that the sector was a leading indicator. I think this belief is rooted in Dow Theory and I am no expert there but I always try to note when once important "relationships" suddenly stop being discussed. That sector is giving the best support to the bear case in my view. Weakness in transports is also consistent with a continued weak production numbers.*

The bull case is still strongest in housing. Whether it is the all clear or just evidence of too many shorts remains to be seen. Also on the bull side was Walmart's (WMT) positive response to yesterday's data. Continued strong action in these sectors is pretty inconsistent with a thesis based on a weakening consumer.

*The airlines did not really play in last year's rally but the S&P downgrade of Northwest (and the insider sales) probably has some future relevance to the transport sector and possibly credit markets.

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