The market is getting peculiar – prices failed to hold onto gains on Tuesday despite better than expected economic data releases, but managed to trade higher on bad news? Yesterday was not a good day for US as far as fundamentals are concerned – Q1 GDP Final print came in at 1.8%, a quarter lower then the initial official estimate of 2.4%. Generally, the final print tend to agree to the earlier estimates, and even in the event that changes do occur, such sharp revisions are rare. To twist the knife further, Personal Consumption grew at 2.6% vs an estimated 3.4% in Q1, suggesting that the rosy picture that has been painted earlier this year is not entirely accurate.
To be frank, a Q/Q growth of 1.8% isn’t bad (how Euro-Zone would kill to have this number), and is certainly head and shoulders above the previous quarter’s 0.4% growth. Nonetheless if we compare this number to all quarters ever since the financial crisis started, the 1.8% print puts it just under the 50th percentile (e.g. below average) and below the 33th percentile (way under-performing) if we were to compare it with growth starting from 2009, when the economic turnaround started. Furthermore, it would be interesting to know if Bernanke et al used the pre-revision figures when they believe that the US economy is stable enough for them to talk about tapering QE3 in 2013 and potentially stopping it entirely in 2014.
Given the curious behavior of stocks towards the news release, perhaps a plausible explanation to yesterday’s 0.96% gain in S&P 500 and 1.02% gain in Dow 30 is that the market does not believe that Bernanke has the gall to indeed carry out his QE3 tapering timeline as they do not believe that current US economy growth is sustainable without QE. This would explain the lack luster of bulls on Tuesday and the overwhelming optimism yesterday. The implication would be that market is looking out for bad news so that Bernanke would be forced to continue QE for an extended period of time, and is actually disappointed when good economic data proves Bernanke right. Perhaps this explanation is a long shot, but if proven right, would mean that market will be hugely disappointed when the actual QE tapering does happen, and we could see sharp bearish moves following suit.
S&P 500 Hourly Chart
From a technical perspective, price has successfully moved away from the descending Channel that was in play post Bernanke’s initial tapering talk. S&P 500 has successfully cleared the 1,600 mark and is now trying to push higher towards Channel Top. Stochastic readings are flattening out currently, suggesting that current bearish move (from recent rebound from Channel Top) may be over soon. Furthermore, there appears to be a divergence between recent Stoch peaks and price peaks, which suggest that current bearish cycle may not be entirely accurate/reliable. This increases the likelihood of an interim trough forming from here, and increases the chance of a move towards Channel Top. Nonetheless, it is still worth noting that Futures prices are trading below the initial rebound of 21st Jun. As long as price remain below the level, there will be risk that 1,600 will be broken which may increase the likelihood of price breaking Channel Bottom and negate current recovery upward pressures.
Dow 30 Hourly Chart
Dow 30 is more bullish than S&P 500, with price already breaking above the rising Channel and using Channel Top as a support. Stochastic interpretation is similar to S&P 500, which favors a bullish run from here. However, given current proximity to Oversold regions, a break of the 15,000 psychological level may prove to be difficult.
On the USD front, the Greenback is slightly stronger but that is mostly due to the spectacular downward movement in Gold yesterday. Against other majors, Greenback is sitting nicely in the middle, strengthening against EUR, CHF and GBP but weaker against AUD, CAD and JPY. Regardless, it is clear that USD weakened across board at 8.30 am EDT, when the GDP numbers were released – this lend support to the “long shot” explanation above, and similarly suggest that we could see further USD strengthening should Tapering does happen in 2H 2013.
GBP/USD – Pound’s Woes Continue as UK Goverment Announces Deep Spending Cuts
USD/CAD – Canadian Dollar Improves as US GDP Disappoints
AUD/USD – Little Movement as Rangebound Trading Continues