Helter-Skelter - 07/21/11

I continue to expect a volatile U.S. stock market contained in a relatively narrow range.

 

"When I get to the bottom
I go back to the top of the slide
Where I stop and turn
And I go for a ride
Till I get to the bottom
And I see you again."

-- The Beatles, "Helter Skelter"

With nearly every pundit expecting new market highs, I was beginning to feel like a minority of one when I expressed my market skepticism recently.

I don't think it is going to be fun nor will it be easy in the weeks ahead, and a healthy dose of skepticism should not be abandoned as we move toward the higher end of my baseline expectations for the S&P 500.

Yesterday's stock market, especially in the sub surface tech patch, was less than meets the eye. Away from Apple (AAPL), the fundamentals and price action as discussed by Jim "El Capitan" Cramer was bad, and many that have recently embraced technology got punished, especially in the high-beta, high-octane sub sector of technology -- Riverbed Technology (RVBD), F5 Networks (FFIV), Citrix Systems (CTXS), Informatica (INFA) and so on. Even better profit releases, such as Intel (INTC), were met with selling, indicating that the recovery has been, to some degree, discounted.

Remember, technology is dependent on Europe, and, as such, investors shouldn't be surprised that, after huge runs, the stocks have gotten hit this week.

And on the fundamental front, things seem to be slowing, and projections for economic and profit growth remain in jeopardy.

  1. Eurozone slowdown. The composite output for Germany decreased to a 24-month low of 52.2 in July from 56.3 in June. The flash services activity index dropped to 52.9 in July from 56.7 in the previous month and was well below forecasts for a reading of 56.1. The latest reading was the lowest in 17 months. The flash purchasing managers' index for the manufacturing sector fell to a 21-month low of 52.1 in July from 54.6 in June. (Consensus was for 54.1.) The flash eurozone composite PMI fell to a 23-month low of 50.8 in July from June's 53.3. (Consensus was for 52.6.) The latest reading was the lowest since August 2009 and signaled a near-stagnation of private-sector output, the rate of growth having slowed sharply in each of the past three months. The eurozone manufacturing PMI slid to 50.4 from 52, well below economists' forecast of 51.5. The services PMI declined to 51.4 from 53.7. (Consensus was for 53.2.) Both manufacturing and services index readings were the weakest in 22 months.

    2.  

  2. China slowdown. HSBC's China "flash" purchasing managers' index fell to a 28-month low of 48.9 in July, down from 50.1 in June, marking the first time the gauge has indicated a contraction since July 2010. The preliminary version of the PMI output index also showed further deterioration, dropping to 47.2 in July from 49.8 in June. Both these prints were below expectations. (The bullish cabal will interpret this positively as a signal that China's tightening is over. I disagree with that analysis.)

    3.  

  3. Can-kicking continues both in the eurozone and on our shores. A selective default in Greece appears likely, and a temporary fix appears likely in the U.S. Investors should see themselves through both. Again, growth-deflating forces, in the aftermath of the credit crisis, seem to be the order of the day around the world.

I continue to expect a volatile U.S. stock market contained in a relatively narrow range (S&P 500 between 1250 and 1350). As such, risk/reward is slightly negative now.

More important, this environment is likely not suitable for investing (buy-and-hold), but it is likely an ideal setting for opportunistic traders.

Buy the dips, and sell the rips.

And look out, helter-skelter.