Investors are shrugging off the rise in weekly Unemployment Claims and are more encouraged by this week's outperformance in manufacturing data. The ‘cash-for-clunkers' program is paying dividends, driving the Philly and Empire manufacturing indexes higher while consuming tons of crude. These statistical developments are helping buoy equities amid mixed global economic data. Investors are also weathering the storm of a massive downturn in the Shanghai Composite Index (SCI). Though the SCI recovered by over 4%, the move was purely psychological.
The government announced the approval of a few composite ETFs, and Chinese investors took this as a signal that the government will take future actions if necessary to prevent a stock market crash. However, investors are ignoring the fundamental truth that a good portion of the record bank lending during the first 5 months of the year has been fed into equities. Hence the government's desire to tighten liquidity in order to prevent major asset bubbles. Let's not even think about what portion of the lending has been put into real-estate. In other words, loose interest-laden money has likely been a large catalyst behind the SCI's incredible ascent from 2008 lows. Therefore, investors should pay less attention to daily movements in the SCI and focus more on longer-term, fundamental behavior. The situation is still developing, and we will monitor it closely since the SCI's movement is having such a large psychological impact on Western markets.
Shifting back to the West, the U.S. will release Existing Home Sales tomorrow along with a boat load of PMI data from the EU. Hence, the week could end on a somewhat volatile note. Uncertainty is rising considering the sustainability of the global economic recovery after stimulus packages run out of funds. The consumption behavior of U.S. citizens is still in a bad state, as seen in last week's U of M and retail sales data points. U.S. over-consumption sponsored by loose credit policies was the driving force behind the global economy of the past, so it remains to be seen how the global economy of the future will be fueled. Investors are hoping new Chinese consumption can be the driving force, hence the added interest in the performance of the SCI and China's economic data.
Meanwhile, the S&P futures are hovering back around 1000 as we anticipated. Investors are waiting in the wings for a major news event, and it might not come this week. Bulls are hoping to keep the S&P above 1000 and take another jab at previous 2009 highs and our 2nd tier uptrend line. However, the S&P futures may continue to fluctuate in a wide trading range around 1000. The EUR/USD, GBP/USD, and gold are experiencing similar forms of consolidation. As for the downside, the futures have weekly lows and our 1st tier uptrend line to fall back on.
Resistances: 1003.5, 1006.5, 1010.75, 1016
Supports: 998.5, 994.25, 990.75, 986