markets are digesting their most recent gains off of the April lows, we are
looking at potential catalysts – some obvious, some less so – which will allow
the markets to break out of their recent trading ranges.
A few items
come to mind. While some are impossible to time – a Hedge fund blow up,
terrorist activity, Avian flu outbreak outside of Asia, significant Iraqi
developments – others are potentially more “game-able.” We’ll
concentrate on those catalysts where we at least have a fair chance of
potentially forecasting market-moving outcomes:
Payrolls: The most significant
economic report of the week, if not month. While most investors took solace in
April’s NFP Report, we are in a distinct minority who view April data as an
outlier. This is primarily due to the BLS’ Birth/Death adjustment. April 2004
saw a similarly disproportionate impact. As such, a weaker than expected
release may force investors to reconsider their expectations of an ongoing Goldilocks
economy; A sell off may test resolve and help form the next substantial
relief?: Last year, we noted
that our upside target for Oil was $57-59; After reaching that level, Oil
pulled back towards $47, where support was plentiful. We now expect a move back to the old highs – and beyond – towards
$60-62; We do not believe that rising stocks of sour crude with its lower
gasoline yields and environmental issues will provide much in the way of relief
to Summer drivers;
bubble bursting: We remain in
the distinct minority in believing that housing is not a bubble – at least, not
yet, anyway, by a technical definition of what a bubble actually is. That
doesn’t mean a bubble can’t or won’t form, it simply suggests that this is not
an immediate danger to the market anytime soon. (More on this issue tomorrow).
EU problem: While the DoJ has let Microsoft off the hook, their
European equivalent never seems to let an opportunity go by to administer a spanking
to Gates & Co. Given the company’s weighting in SPX, Dow and NDX, a
severe punishment, while a low probability event, could have a significant
Weakness: The French “Non” vote will pressure the Euro versus the
Dollar. Given that the weak dollar hasn’t done diddley for US exports, we are
clueless as to the impact that this development will have. Color us confused at
expectations remain for a tradable low in June.
We advise using pullbacks
to s l o w l y build long positions in higher Beta sectors:
Tech, Energy, Semis.
UPDATE: May 31, 2005 9:31pm
On the way home tonite, I got to thinking about the next Fed meeting at the end of June . . . Any signal from the Central Bank that the tightening cycle is about to pause potentially launches a moonshot.