Reasons to be cheerful

Treasury yields higher, dollar higher, stocks lower is the way of things and so it was yesterday as the correction in stocks which started last week continues. We had been through an extended period of a lack of volatility, at some stage it has to end. No sector was left untouched yesterday, the technology sector was affected as the FTC turned its guns on Amazon, claiming in effect it abuses its power with the consumer. This comes off top of the recent action against Alphabet of effectively of similar. The resilience of the consumer has helped support the US economy this year and there was some good news again on that front yesterday as Costco, everyone’s favourite mega store, announced results ahead of the market forecasts.

We are in a period of time that one could make an easy case for stocks to move lower, with higher yields, weakening PMIs, weak leading indicators, higher oil prices, the threat of a US government shutdown, and weak growth out of Asia. One can also make a case for this recent sell-off to be a little blowing off steam to provide the base for the yearend rally. Some of this will depend on the upcoming earnings quarter. On the plus side, analysts have become more positive as earnings revisions are on an upward trend.

The S&P 500 has corrected by around 6% from its peak in June, which is about what one would expect in a pullback after a strong rally. Are bond yields going higher from here, probably not much, and are more likely to fall? Is the dollar expensive relative to other currencies based on purchasing power? Yes. Is the US economy going to grow this year? Yes. Will an agreement be found between the Republicans and Democrats to raise the debt ceiling? More than likely. Will the earnings season be a positive one relative to expectations, the likelihood again is yes. The outlook statements may be more cautious. Are US small-cap stocks cheap? they are. Is there plenty of money on the sidelines waiting to go in at the right opportunity? Estimates are that over a trillion dollars have been parked in money market funds so far this year. Inflows from retail remain weak as sentiment indicators are moving back into fear territory. Hedge funds positioning is cautious. There are plenty of reasons to not be too bearish. 4300 for the S&P 500 is where it found support earlier in the year, let us see if that is the case this time. The 200-day moving average, for what its worth, is around 4200. That level may prove a better test.