Powell Goes On Defense

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It seems as if the market picked up on Federal Reserve Chairman Powell’s tone. He was too defensive about the recent actions that were taken to arrest a free-falling economy.

He reminded Senators on the bank finance committee that he hinted at bond purchases on March 23^rd, which did happen, and the purchases probably put in a market bottom. Still, the news of actual direct purchases rather than buying corporate bonds via exchange-traded funds (ETFs) upset the market purists. 

The corporate bond market, including the high yield (see chart), took off like a rocket before the Fed did any actual buying. It was revealed later that the Fed got stuck with bonds from companies facing bankruptcy, which may have been the reason for buying individual corporate bonds.

So, while nudging lawmakers to act, Powell was justifying his actions on bond-buying:

“It’s out of an excess of caution to preserve these gains for market function by following through,” suggesting he could slow purchases if things continue to improve.

The dilemma outlined by Powell is the initial rebound, which is much better than anyone anticipated, is still not enough to reverse deep damage to the economy from the lockdown, and the subsequent new reality of social distancing, and limits on crowds. This is a real concern that should not be ignored by anyone.

Yes, the bounce has been nothing short of remarkable, but it happened with help from the Federal government and the Federal Reserve. 

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That near-term risk and extra nudging were underscored after the close of the market, and Norwegian Cruise Line (NCLH) announced it was canceling all sailing through the end of September. The stock tumbled in after-hours trading, and it will be interesting if buyers emerge to buy on a weakness today.

Technical Hurdles

The action in major indices is a classic consolidation of the big recent rally, but it’s also a test of the rally, which means key support points must hold. The key resistance points:

• NASDAQ sees initial resistance at 9,926, then at 10,080
• Dow Jones Industrial initial resistance: 26,413, then at 26,615
• S&P 500 initial resistance at 3,138, then at 3,200

Fund Managers Conflicted

The Bank of America Merrill Lynch’s (BofAML’s) survey of global fund managers was released, and it was filled with confusion. In fact, this statement best summed up the sentiment:

While Wall Street might be past the "peak pessimism," June optimism remains "fragile, neurotic, nowhere near dangerously bullish," wrote Bank of America Chief Investment Strategist.

The 78% of money managers say the market is oversold, and 53% say this is a bear market rally; and yet, cash declined to 4.7% from 5.7%.

Too see the chart, click here, and here.

This is a contrarian indicator, which means extreme pessimism is supposed to be a buy signal.

The Message of the Market

Although the market meandered after hitting a Powell-induced air pocket, there was a late nudge that focused mostly on cyclical names.

While market breadth was impressive across the board, it was gangbusters on the New York Stock Exchange, where there was almost a 5:1 ratio of winners and losers. The up volume was more than a 5:1 ratio, greater than the down volume.

Energy took the lead after a pullback back in West Texas Intermediate (WTI). Health Care performed well, and Consumer Discretionary got a lift from the strong retail sales report. 

We are spying Materials on reports the administration is preparing a $1.0 trillion infrastructure plan.  This stuff happens in every election cycle, but there is a major need to shore up our roads and bridges. 

Portfolio Approach 

We added two new positions this week, one in Consumer Discretionary and one in Industrial.  Our cash position is now 0.

May housing starts for new construction increased 4.3% as low mortgage rates and economies reopening sparked buyers and builders. Hard hit areas like the West and Northeast saw a spike of 21.5% and 12.8%, respectively.  Annual start rate rose to 974,000 units from 934,000 in April, which was the 5-month low.  The South and Midwest however declined 16% and 1.5%, respectively.

Permits rocketed up 14.4% to 1.22 million annual rate.  All regions experienced a rise in new permits.

Mortgage applications for May also soared up 26.1%. 

The futures are pointing to a positive open.