GROSS MISCALCULATION – Once again, currency markets appear to be getting it right, while equities continue to misinterpret the significance of positive economic developments in the US economy. An improvement in US economic data only inches the Fed closer to monetary policy reversal, which ultimately benefits the US Dollar on yield differentials (as we are seeing), and should weigh on US equities on the same merit (as we are not seeing). Stocks have been fueled by ultra accommodative Fed policy and a move away from this path and towards tightening should open the door for a mass rotation away from US equities. While I believe that stronger US economic data will fuel equity strength in the long run, I can not support this argument over the short and medium-term. There is far too much pricing out of Fed intervention that needs to flush through the stock market, before we can think about returning to traditional and more intuitive behavior.
A DIFFERENT PICTURE - On Monday I talked about a possible indicator that stocks could be on the verge of topping, in the form of a lack of bearish articles from Zerohedge. Now don’t get me wrong. I am a big fan of Zerohedge and love the daily reads. My point was just that if the most bearish source out there had slowed down with the production of bearish pieces (specifically to stocks), simply (and understandably) out of the frustration and pure exhaustion from the fact that stocks weren’t dropping (despite good argument for well over a year), perhaps the time had finally arrived. I even think in some backwards way Zerohedge secretly understands this and has stopped the frequency of such pieces, to actually help the reversal. I understand that sounds crazy and I am just having a bit of fun. But the more relevant and interesting point comes from a piece produced today which paints a much different picture from the one seen over the weekend with Chinese PMI data. While “official” China PMI data has been booming, HSBC PMI is moving in the opposite direction and still shows contraction. Food for thought. You can read the full article HERE.