Financial Professionals

Market Insights

A A A

A Buyer's Strike

05/24/2012
Recent characterizations of the market suggest that this week’s price action is a global asset liquidation with the intent to raise and preserve cash holdings. I completely disagree. Rather, I expect this week’s price action represents a classic “buyer’s strike.” An orderly selloff of global asset holdings has been well underway since early April’s lousy U.S. labor report. Identifying the difference is important since a pure buyer’s strike will position the market to rebound much quicker than if we were in the midst of a global liquidation. I suspect Wednesday afternoon’s sharp rally was a small glance at the potential of a buyer’s strike. Technically, the S&P 500® Index (SPX) remains above its 200-day moving average, which rests at 1281.12 (Figure 1.1).
 
However, I also expect the market will remain incredibly challenged throughout this quarter. The market will remain in a sideways consolidation range fueled by a buyer’s strike. This morning’s global economic data is evidence to my point. None of the data provides any clarity on resolving the multiple headwinds facing the market in the near term. Those headwinds will persist until the early July earnings season. Q2 will remain incredibly frustrating for investors.
 
The strategy remains “less is more” – seek a singular solution to protect portfolios. Do not begin to aggressively alter actual holdings. 
 
Highlights from this morning’s global economic data:
 
UNITED STATES
•   Durable Goods +0.2% versus prior month’s -4.2%
•   Initial Jobless Claims 370,000 versus last week’s 370,000 (Figure 1.2)
 
None of the recent U.S. economic data provides any clarity surrounding the FOMC’s next move at its June 20th meeting. I suspect even the FOMC is unsure what to do.
 
EUROPE
•   Germany’s Q1 GDP rose 0.5% after contracting -0.2% in Q4 2011
•   German Business Confidence fell this month to 106.9 from last month’s 109.9 (Figure 1.3)
•   Germany’s May PMI Manufacturing fell to 45.0 from last month’s 46.2 (Figure 1.4)
•   Germany’s May PMI Services held at 52.2 from last month’s 52.2
 
The slowdown in the German economy is a major headwind for Europe but also a catalyst for those seeking further ECB monetary easing measures. Additionally, it will refocus Europe’s fiscal conversation on more growth measures and less on austerity. I expect continued “posturing” among all European nations and continued uncertainty for global markets ahead of the June 17 Greek elections. The ultimate message investors want to hear from European fiscal authorities is a plan addressing bank solvency. Liquidity has, and will continue, to be addressed. Markets will only lift on a solvency plan, blanket European banking insurance.   
 
CHINA
•   HSBC Flash PMI recorded a 48.7, down from last month’s 49.3
 
As many know from my previous blog comments, my focus at the end of month is actually on PMI Manufacturing, not HSBC Flash PMI. I expect the May31 PMI Manufacturing Index to be down from last month’s 53.3; consensus is looking for 52.0. What investors should be confident about is that the People’s Bank of China is easing monetary conditions and will continue to ease more aggressively as the second half of 2012 presents itself. 
 
Figure 1 S&P 500 Index (SPX)
 
Source: Bloomberg
 
Figure 2 Initial Jobless Claims, May 2008 to May 2012

Source: Bloomberg
 
Figure 1.3 German Business Confidence, May 2010 to May 2012

Source: Bloomberg
 
 
Figure 1.4 German PMI Manufacturing, May 2010 to May 2012

Source: Bloomberg
 

 

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.