MARKET SELLS OFF ON FED PAUSE -- UTILITIES GAIN WHILE TRANSPORTS FALL -- CONSUMER STAPLES REMAIN MARKET LEADERS -- RETAILERS AND HOMEBULDERS LEAD DAY'S DECLINE
RETAILERS AND HOMEBUILDERS FALL... The Fed paused today as pretty much everyone expected. Unfortunately, the stock market fell on the news. Part of the reason may have had to do with the wording of the accompanying statement. The Fed acknowledged economic slowing, especially in the housing sector. Its claim (or hope) that inflation should start to moderate was less convincing. The problem is there's no evidence to support that view. Commodity prices remain strong and recent reports show a pickup in core inflation measures. A big jump in unit labor costs was reported just this morning, which is also potentially inflationary. If the Fed's optimistic view on inflation proves incorrect (which I suspect it will), it may have to reconsider today's action. A pause doesn't mean a stop. Rising inflation and a weakening economy lead to stagflation which we haven't seen since the 1970's. I suspect that's where we're heading. Not only did the market averages fall, but defensive sectors like consumer staples and utilities rose. At the same time, consumer discretionary stocks were the day's weakest sector. That was due largely to heavy selling in retailers and homebuilders. Chart 1 shows the S&P Retail Index falling today after a failed test of its 50-day moving average last Friday. Its relative strength line has been dropping all year. The same is true of the PHLX Housing Index in Chart 2. In fact, the two charts are remarkably similar. The fact that neither one rallied on today's Fed pause isn't an encouraging sign.
Chart 1
Chart 2
UTILITIES RISE AS TRANSPORTS FALL ... These next two charts revisit a theme I wrote about a couple of weeks ago (July 21, 2006) having to do with the fact that rising utilities and falling transports are a bad combination for the market. Unfortunately, that negative trend is continuing. Utilities were the day's strongest sector while transports were one of the worst. That means that investors are still buying defensive stocks and selling economically-sensitive ones. At the same time, the Dow Transports continue to trade below their 200-day moving average. That's a sign that investors are worried about the economy. Today's Fed inaction did nothing to change the trend of either index.
Chart 3
Chart 4
CONSUMER STAPLES GAIN MORE GROUND... Consumer staples have outperformed the S&P 500 since April. And they did so again today in the face of a falling market. Some of today's staple leaders were Campbell Soup, General Mills, CVS, Coca Cola Enterprises, and Reynolds American (tobacco). CPB traded at a six-year high while General Mills hit a new record. So did CVS. The monthly bars in Chart 6 show the big drug chain exceeding its 2001 high. Consumer staples are usually one of the market's strongest groups during an economic and a housing slowdown. So are utilities, healthcare, energy, and telecommunications. An article in Barrons this last weekend (What Road to Take When Real Estate Is Not A Sure Bet) listed those same groups as being the best historical performers during a housing slowdown. Consumer discretionary stocks are one of the weakest.
Chart 5
Chart 6
MAJOR INDEXES FALL ON RISING VOLUME ... About the only thing holding stocks up recently was hopes for a Fed pause. That's why today's market selloff on the Fed pause has to be bad news for market bulls. I wrote last week that the market rally was on shaky ground owing to a weak seasonal trend (August and September are usually weak months) and lack of upside volume to support the summer bounce. That trend has gotten even worse as shown by the next three charts. All three major market ETFs failed tests of overhead resistance barriers. And they did so on rising volume. That negative trend started with Friday's downside reversal day on rising volume. It got even worse today. The Dow Diamonds (DIA) failed a test of their early July peak at 112.41. The S&P 500 SPDRS (SPY) are back below their July peak at 128 (the equivalent of 1280 in the cash S&P 500). That has the look of a failing rally attempt. The fact that the Nasdaq market (and small caps) were the day's weakest market groups is also worrisome. Chart 9 shows the Nasdaq 100 Shares (QQQQ) unable to clear their 50-day average. Downside volume has increased there as well. One market that may gain from today's Fed decision is gold. That will be especially true if the dollar continues to weaken as I suspect that it will.
Chart 7
Chart 8
Chart 9
