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Weekly Views from The Corner – August 2, 2016

US durable goods orders fell 4.0% in June vs. 1.1% drop expected

Wednesday, 27 Jul 2016

Overall orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, tumbled 4.0 percent last month, the biggest drop since August 2014, after a downwardly revised 2.8 percent fall in May.

US preliminary Q2 gross domestic product at 1.2% vs. 2.6% expected

Gross domestic product increased at a 1.2 percent annual rate after rising by a downwardly revised 0.8 percent pace in the first quarter, the Commerce Department said on Friday. The economy was previously reported to have grown at a 1.1 percent pace in the first quarter.

The S&P 500 continues to hold the all-time new high breakout it put in over three weeks ago by trading sideways ever since.  The sideways, consolidation type trading continues in a very tight range which is to say on a daily basis, the intra-day moves have been quite small for the S&P.  This is constructive behavior for a market after experiencing a tremendous surge to the tune of nearly 9% from its turnaround low point to the new high level.

This past week, as depicted in our header excerpts above, the macroeconomic news was less than impressive.  Two important economic releases came in much lower than expected speaking to continued economic concerns.  Importantly, against this disappointing macro news the S&P was able to hold its levels without breaking down or even attempting to pull back to its breakout level.  This is impressive behavior from the stock market after experiencing such a large gain in such a short period of time while being presented with poor economic results.

There is an old adage in the world of trading markets that states:  It’s not the news but the market’s reaction to the news that is most important.  The behavior –  thus far –  by the stock market against the above releases speaks to this adage.  To be fair, via SPX9 as it is designed to dig deep into the S&P 500, there was some deterioration and initial flags of concern within the depths of the 107 sub industries it tracks.  I emphasize “initial flags” being they were noticeable but certainly too early to offer as something to point to as concerning.  Those will continued to be monitored closely and shared accordingly.

As we currently stand with our week ending period of July 29th, the overall H&UP rating via the SPX9 system is 82%.  This is a minor reduction from the 84% the prior two periods.  Regardless of this minor reduction these levels continue to represent strength and structural vitality within the S&P 500.  This level of strength takes us back to much healthier times of two years ago for the stock market whereby it was trending upward with offensively oriented sectors leading the trend.  This is a marked change from what we have come to recognize as nearly normal in the last year-plus whereby defensive sectors were leading while the S&P 500 itself was unable to do anything but trade in a volatile trading range.

Speaking to increased health relative to offensively oriented sector leadership Technology continues to show more strength with its ability to hold its all-time high and has actually added to it a bit in the last couple of weeks.  The long-standing leading sector of Utilities continues to hold its strength as well speaking to this on-going defensive leadership continuing.

Circling back to the market’s reaction to the weaker than expected news takes us to the discounting mechanism the market is known to be.  The essence of the market’s reaction to the news being more important than the news itself is that it sees something beyond what is currently being released.  In other words, it sees better days ahead if you will.  Importantly, its crystal ball abilities is not perfect hence the sharp downdrafts we have come to know when it discounts “better days ahead” and they turn out not showing up.

As we stand here in the midst of the summer doldrums the fundamental news via earnings for the S&P 500 remain the focus.  Can we see better earnings come through as expected for the component companies in this index which will begin to put an end to the “earnings recession” in which we have seen negative earnings growth for the last six quarters?  If better earnings do not materialize just as better broad economic results have not via our headlines above, we may see the aforementioned crystal ball abilities of the market challenged yet again.

As we move through the heart of the summer time and more toward the early fall season the market will have a wealth of data to process.  We will continue to monitor closely how it handles the data via the structural make-up of the S&P 500 itself and will share accordingly.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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