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Bears find a reason

03/23/2012

It hasn’t been much fun for the bears in 2012, as the “stay in cash” platform has been quieted by solid risk asset performance with nary a correction. On Wednesday evening, however, the March China HSBC Flash PMI was reported, below estimates, at a soft 48.1, down from February’s 49.6.  The SPX (S&P 500 Index) quickly retreated from its four year high of 1414.00, achieved on March 19. Let’s take a look at what might happen next.
 
First, some thoughts on the China HSBC Flash PMI:


 
•         Frequent users of our Virtus monthly calendar will note that the Flash PMI is never included on the calendar. Instead, I find the end-of-month China PMI reported by the China Federation of Logistics to be a more accurate reading of domestic manufacturing conditions. There have been consistent historical inaccuracies in the HSBC Flash PMI, relative to the end of month PMI.
 
•         The last four readings for the end of month PMI have been 49.0, 50.3, 50.5, and 51.0.  A one month softening does not negate the recent improvement, unless the end of month figure posts sub 49.0.
 
•         Let’s say, hypothetically, that the end of month PMI is woefully soft, below 49.0.  Keep the big picture in mind - the People’s Bank of China has plenty of room to ease monetary conditions further in the form of additional Reserve Ratio Requirement cuts and actual interest rate cuts. They have the tools to support growth.


 
What to focus on for the next few weeks:
 
•         With end of quarter approaching, I would be surprised if a significant correction develops in the final days of March.
 
•         As the calendar flips to April, watch closely for 3 things:

1.    Does a new quarter bring significant re-allocations out of Treasuries into equities? 
2.    Have rising oil prices slowed the pace of private sector job growth?
3.    Just how deep will the earnings contraction be?
 

Market Consequences:
 
Natural resources, industrial, and energy equities are trading poorly this week, furthered fueled by the weak China figure. However, yesterday’s price action still provided positive price action from select financials, technology, and consumer names. In fact, several consumer names with direct China exposure posted new 52 week highs: Mead Johnson (MJN); Starbucks (SBUX); and Yum Brands (YUM).
 
Municipal and high yielding bonds were well-supported yesterday, as was large technology, evidenced by positive performance from IBM, Intel (INTC), Google (GOOG), and Microsoft (MSFT).  Discover Financial (DFS), once the “poster child” for an ailing domestic economy, reported solid earnings and commentary such as “consumers continue to expand spending” and “Card delinquencies trending near historical lows.”
 
Finally, if a deeper correction is unfolding, I suspect it will be the type of price action that places the SPX into a sideways consolidation range. Maybe a near term high is in place at 1414.00, but, until the SPX trades below 1333.00, I expect any correction to be defined as a “pause that will refresh.”
 
S&P 500 Index (SPX) 6/23/11 to Present with “line in the sand” drawn at 1333.00
 

Source:  Bloomberg

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