Hale Stewart | Aug 09, 2015 03:14AM ET
The ISM’s US manufacturing number decreased from 53.5 to 52.7, but remained above the key 50 level. New orders and production continued their lengthy periods of expansion. 11 of 18 industries grew. The anecdotal comments are interesting:
The oil slowdown is starting to have a wider impact, with its reach now expanding to the chemical industry. Several comments mention a “summer slowdown,” which has mixed implication. The negative is obviously decreased/slower growth. But the positive is people may be more inclined to take time off during the summer, meaning they have enough confidence in the economy that they can miss a week. Overall, that’s very positive.
ISM also released the Service report, which was up 4.3% to 60.3%. New orders, employment and business activity all increased smartly; 15 of 17 industries were expanding. The anecdotal comments were very bullish:
The comments are littered with statements of “new business” and increasing opportunities. Unlike the manufacturing report, there is no mention of a slowdown or weakening business. As services comprise a large percentage of the US economy, this is a very important report.
The employment report was good.Total establishment jobs increased by 215,000. A year ago, goods producing job increases totaled 53,000; in this report, the number was 17,000, which is a drop of 36,000. Lower exports and weaker energy demand go a long way to explaining the Y/Y drop. Other report numbers were positive; average workweek, wages and previous month’s revisions all showed a slight increase.
Conclusion: according to these reports, the US economy is doing well. Both the service and manufacturing sector are expanding while the jobs market is growing over 200,000/month. However, the Atlanta Fed’s GDP now forecast is less optimistic, giving the 3Q only a 1% growth rate:
h3 The Markets/h3The markets are still expensive: the current and forward PE for the SPDR S&P 500 (ARCA:SPY)s and PowerShares QQQ Trust Series 1 (NASDAQ:QQQ)s are 21.59/23.11 and 17.82/19.92, respectively. This means the indexes are in desperate need of top line revenue growth. It does not appear to be coming. From Zacks:
We know that the picture emerging from the Q2 earnings season is one of overall weakness – growth is non-existent, with revenue gains particularly hard to come by and companies struggling to meet even the lowered top-line estimates. The outlook is not better for the current period either, with Q3 estimates following the by-now familiar downtrend that we have been seeing for the last many quarters.
There are some bright spots, however. Retail, finance and health care are generating some fairly decent numbers, with the energy sector being the primary reason for the downward momentum. And the pace of revisions has decreased. Still, this is not the environment we’d like to see.
And it’s obvious the earnings weakness is starting to take a toll on the markets. At the close of trading on Friday, important technical damage had been done to the SPDR Dow Jones Industrial Average ETF (ARCA:DIA)s, small and micro-caps (via iShares Russell 2000 Fund (ARCA:IWM) and iShares Micro-Cap ETF (NYSE:IWC)). The type of damage for all three is the same:
All closed below their 200 day EMA. This is a very important technical development because the 200 day EMA separates bull and bear markets. The shorter EMAs are bearishly aligned: the shorter are below the longer, all are moving lower and prices are below, which will continue to pull them down. Momentum is weak as is strength.
The SPYs are the only average to break the trend:
Prices continue to trade in a narrow, 10 point range.
Conclusion: the markets have now taken a slightly bearish tone. As I noted last week, market breadth is weak. Some of the sell-off can be attributed to the summer doldrums. However, the lack of meaningful earnings growth is a concern.
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