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By HaleStewart August 21, 2016 8:04 am
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US Equity and Economic Review: A Less Bad Earnings Season Supports a Modest Advance

     On Thursday, the Conference Board released the latest leading and coincident indicators.  The LEIs increased .4% M/M and 1.1% on a rolling, 6-month basis.  This is the strongest gain they’re had in 7 months.  The CEIs also increased .4% M/M, while rising .7% on a rolling, 6-month basis.  The breadth of the gain of each indicator’s components was very strong: 9/10 LEIs rose and all of the CEIs increased:


     Housing news was positive.  Building permits declined a slight .1% M/M, but increased .9% Y/Y.  Starts were far more bullish: they increased 2.1% M/M and 5.6% Y/Y.  But as the following chart illustrates, permits and starts have moved sideways for the last year:


     Industrial production, which is one of 4 coincident indicators, rose a strong .7%.  This was the second consecutive increase and the 3 in the last 6 months.  All market and industry groups rose -- including mining, which has been a prominent drag on this data series:

The following chart from the FRED system places the IP number into context with the other 4 primary coincident indicators, showing an economy that is expanding moderately:

Economic Conclusion: this was a strong week for economic news.  The LEIs and CEIs, which not only summarize numerous key data points but also have a history of being very accurate, each printed strong headline numbers supported by broad-based gains of individual components.  Although building permits and housing starts are moving sideways, they still point to a solid housing recovery.  And the .7% gain in industrial production was its strongest gain in 7 months, also indicating that the negative impact of the oil market slowdown is waning.  All the reported data pointed towards continued expansion.      

     Market Analysis: The markets have recently rallied above previous highs, thanks to a fairly decent earnings and revenue numbers (see here and here).  But the 2Q “strength” is relative; in reality, the numbers are “less bad” than anticipated.  The slightly positive earnings season explains recent market gains: the SPYs have advanced above recent technical resistance at the 217.5 level, consolidating gains slightly above that level.  The QQQs have made similar upward progress.

     But the weekly SPY chart foreshadows a slowing advance:

Prices have moved through the 210-212 area that provided resistance during 2015.  But the recent advance has stretched technical indicators: momentum is near multi-year highs; the number of stocks about their respective 200-day EMA is greater than 80% while the number of stocks above their respective 50-day EMA is in the lower 70s  (The same indicators for the NASDAQ are also high).  These indicators show a market that is already stretched to the upside with very little additional room to advance.

     Ultimately, we’re back where we started at the beginning of 2Q16 earnings season: the market needs more revenue growth to meaningfully move higher.  And for that, we need to wait for third-quarter earnings season.










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