After a dismal June and early July, stock index futures broke out to the upside in spectacular fashion on July 13th. However, prior to this sudden change in sentiment, the technical outlook appeared bleak. There was a final leg down in the five week period that took place through the first part of June and into the beginning of July. The final blow off to the downside took place when the sell stops, that had likely accumulated under the May low of 871.00 in the June S&P 500 futures, finally were taken out. In just over a week, the rally the followed was able to take out the early June highs.
The fundamentals were able to turn on a dime, as well. It all started when a respected banking industry consulting firm turned bullish on a few financial services companies. This was quickly followed by corporate upgrades that came from several large brokerage firms. The fundamentals seemed to fall into place, as well, at about the same time. The majority of the second quarter corporate earnings reports, along with economic reports were better than the analysts’ estimates.
One recent example of better than anticipated economic data was the retail sales report for June, which surprised on the upside by coming in up .6%, against an estimate of a .4% advance. The quarterly chart below shows how weak retail sales had been over the past two years, while currently reflecting a more encouraging environment.
Another bullish surprise came with the release of the weekly initial jobless claims report for the week ended July 11th. This report shows the actual number of people who have filed for unemployment benefits for the first time. Claims were down 47,000 to 522,000, when 553,000 were anticipated and the more telling continuing claims portion of the report were down 642,000 to 6.273 million, against a guess of 6.85 million.
Another example of above consensus data came with the June housing starts report, which was up 3.6% to 582,000. This compared to an estimate of 530,000. More importantly, the building permits portion of the report, which is considered to be a leading indicator, totaled 563,000. This was substantially better than the median guess of 524,000. The chart below shows that the June improvement in starts was not just a single month occurrence. After a long period of declining tallies, the last five months have actually shown a slight improvement in housing starts totals.
Our analysis continues to suggest that second quarter corporate earnings are likely to be better than the analysts’ estimates. The first quarter corporate earnings reports were mostly better than anticipated because cost cutting measures were able to more than offset declining revenues. This situation is holding true again for the second quarter, as well. This and a likely recovering global economy are the main reasons why we are expecting second quarter earnings to remain strong. All of this has put a dent in the arguments that the “slow growth proponents” on the economy have attempted to advance.
There are lingering concerns, however. One of the worries is the recent increase in long term interest rates that some analysts fear could limit the rebound in the economy, or even cause the dreaded double dip recession. Many traders and analysts are worried that higher short term interest rates and firming commodity prices are bearish for the economy. Also, there is concern that the Federal Open Market Committee could increase their fed funds target by 25 basis points to 50 basis points on or before their January 27th meeting. Currently the probability of tighter credit policies from the Fed early next year is approximately 60%, according to financial futures pricing. In spite of this, the majority of the primary government securities dealers believe that there will not be an interest rate increase from the FOMC until much later in 2010 and that the financial futures markets are incorrectly pricing in such a high probability of an “accommodation take away” early next year.
While the bears on the stock index futures market take the traditional view that higher interest rates are bearish for stock index futures, we have been taking an opposite view. At this early stage in the economic cycle, a firming interest rate environment should be viewed as a bullish development and not a bearish one. This is because a firming short term interest rate structure is a reflection of anticipated greater loan demand in the near future and suggests manufacturing activity is about to increase. Our analysis continues to show that the worst of the global economic downturn is behind us and that we can expect the majority of the economic and corporate earnings reports, for the balance of this year and though 2010, to be stronger than the consensus view. There are clear indications that a new multiyear bull market for stock index futures has begun.
If you have questions or comments about this article, please contact Alan at 1.800.243.2649 or email him at alan.bush@archerfinancials.com.
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