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Last Week and This Week in Economics, April 10, 2017

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Last Week in Economics – 4.3.17

Signs of a slight loss of economic momentum continued last week, and while on an absolute level growth remains “fine,” stocks need consistently better data to off-set lack of action in Washington, and that’s simply not happening right now. As a result, stocks are “stuck” at the current levels and downside pressures are building.

Looking at the notable data releases last week, the jobs report was the headliner and it was “Too Cold” according to our preview. March job adds were 98k vs. (E) 175k while wages grew just 0.2% vs. (E) 0.3%. But, the unemployment rate dropped to 4.5%, which tempered the negative fallout and helped stocks shrug off the soft data.

The other two important numbers from last week were mixed. March ISM Manufacturing PMI slightly beat estimates at 57.2 vs. (E) 57.1. However, it declined from the February 57.7. Additionally, new orders, the leading indicator in the report, dipped to 64.5 vs. (E) 65.1.

March Non-Manufacturing PMI missed estimates at 55.2 vs. (E) 57.0, surprisingly hitting a five-month low. New Orders also dropped to 58.9 from 61.2 and employment plunged to a seven-month low at 51.6.

Looking at these PMIs, they’re a great reflection of the current economic data/market dynamic. On an absolute level, the data is strong (remember any-thing above 50 is expansion). But, incrementally we are not seeing improvement, and as such these data points are not helping power stocks higher like they were in Jan/Feb.

Finally, the most disappointing economic data point from last week was March auto sales, which dropped to 16.6M (seasonally adjusted annual rate, or saar) vs. (E) 17.4M saar. That number weighed on stocks last Monday, as worries about the car market and industry continue to quietly grow.

Turning to the Fed, there was a hawkish surprise in the FOMC Minutes last week, as they revealed the Fed may begin to decrease its balance sheet (i.e. buy less mortgage-back securities and Treasuries) later in 2017. Markets reacted hawkishly when this news hit on Wednesday (dollar up, bond yields up, stocks down) as this was a legitimate surprise (no one expected the balance sheet to start to shrink until 2018).

This is a potentially significant event, and it’s something we’re going to be detailing more this week, as any balance sheet reduction will increase upward pressure on bond yields. As we said last week, this was the first true surprise of 2017.

This Week in Economics – 4.10.17

As is usually the case following a jobs report week, the economic calendar is pretty sparse, with the three key reports all coming Friday (which is Good Friday, and markets will be closed).

March retail sales and March CPI will be released Friday morning. Retail sales is important because it’s the first opportunity for “hard” March data to move higher and meet surging sentiment indicators. A beat by retail sales would be a positive for the market and imply actual economic activity is starting to close the gap on sentiment surveys.

CPI is important because of the reflation trade. The market is pricing in rising inflation and better growth, so this CPI number needs to be Goldilocks. It has to be strong enough to show that inflation is consistent, but at the same time it can’t surge so much that it makes the Fed hawkish (an unlikely scenario).

Bottom line, if Retail Sales and CPI can show 1) Better growth and 2) Steady but not accelerating inflation, it’ll help offset the recent mild data disappointments and be a net positive for stocks.

Jobs Report Preview, April 6, 2017

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For the second month in a row the major issue for tomorrow’s jobs report is simple: Will it cause the Fed to consider more than three rate hikes in 2017? If the answer is “yes,” then that’s a headwind on stocks. If the answer is “no,” then stocks should comfortably maintain the current 2300-2400 trading range.

So, tomorrow’s jobs report is once again potentially the most important jobs number in years, as it has the ability to fundamentally alter the market’s perception of just how “gradual” the Fed will be in hiking rates.

“Too Hot” Scenario (Potential for More than Three Rate Hikes in 2017)

  • >250k Job Adds, < 4.6% Unemployment, > 2.9% YOY wage increase. A number this hot would likely ignite the debate about whether the Fed will hike more than three times this year (or more than 75 basis points if the Fed hikes 50 in one meeting). Likely Market Reaction: Withheld for subscribers. Unlock by signing up for your free trial: 7sReport.com.

“Just Right” Scenario (A June Rate Hike Becomes More Expected, But the Total Number of Expected Hikes Stays at Three)

  • 125k–250k Job Adds, > 4.7% Unemployment Rate, 2.5%-2.8% YOY wage increase. This is the best-case scenario for stocks, as it would imply still-stable job growth, but not materially increase the chances for more than three rate hikes in 2017. Likely Market Reaction:Withheld for subscribers. Unlock by signing up for your free trial: 7sReport.com.

“Too Cold” Scenario (A June Rate Hike Becomes in Doubt)

  • < 125k Job Adds. Given the market’s sensitive reaction to the soft auto sales report earlier this week, a soft jobs number could cause a decent sell-off in equities. As the Washington policy outlook continues to dim, economic data needs to do more heavy lifting to support stocks. So, given the market’s focus on future growth, the bottom line is bad economic data still isn’t good for stocks. Likely Market Reaction:Withheld for subscribers. Unlock by signing up for your free trial: 7sReport.com.

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Bond Market Problems (That May Become Stock Market Problems), April 5, 2017

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This is an excerpt from today’s Sevens Report—everything you need to know about the markets in your inbox by 7am, in 7 minutes or less.

One of the reasons I watch all asset classes so closely is because I’ve learned that other sectors often will confirm (or not confirm) a move in the stock market. Right now we are getting a pretty notable non-confirmation from the bond market.

Bond market problemsSpecifically, when stocks rally I like to see: 1) Bond yields rising, which reflects investors expecting greater economic growth and inflation (two stock positive events). 2) A steepening yield curve, which also reflects rising inflation expectations and increased demand for money via loans (something that has been sorely missing from this recovery). 3) I like to see “riskier” parts of the bond market, specifically junk bonds, rising (or at least holding flat) as investors show confidence in corporate America by lending money to riskier companies in search of greater yield (it’s an anecdotal risk-on signal).

Throughout Q4 2016, that’s exactly what we got. First, the yield on the 10-year Treasury rose from 1.54% in late September, to 2.40% at year end. Second, the yield curve steepened as the 10’s-2’s spread rose from 0.81% on Sept. 29 to 1.25% on Dec. 30. Finally, junk bonds were broadly flat during that period (although with notable volatility).

Since the start of 2017, the opposite has occurred. The 10 year started at 2.44% but now is sitting at 2.35%. The 10’s-2’s spread has decreased from 1.23% on Jan. 1 to 1.11% on Monday (the low for the year). Finally, junk bonds rallied through March with stocks, but have since given back some of those gains. If JNK (the junk bond ETF) breaks $36.19 that will be the first “lower low” of 2017, and a negative technical signal.

Point being, the bond market is reflecting an outlook that is comprised of slower growth, less inflation, and more general concern—which is almost the exact opposite of what we’re seeing in stocks right now.

To be clear, this non-confirmation isn’t a guaranteed death sentence for a stock rally. Bond markets gave non-confirmation signals consistently in 2015 when Europe was on the verge of deflation because of the flood of European money into Treasuries, which sent bonds higher and yields lower despite a stock rally. But, that’s not happening now.

So, the “gaps” in this environment are growing in size and number. The gap between political expectations and likely reality regarding tax cuts is as wide as it’s even been. The gap between hard and soft economic data continues to widen as sentiment indicators continue to surge. Now, the gap between bond market direction and stock market direction is widening.

Bottom line, the trend in stocks remains higher, but there are cracks appearing in the proverbial ledge stocks are standing on, and we better get some positive catalysts soon, otherwise we are in danger of a real pullback.

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Why Are Stocks Falling? Blame Auto Sales (seriously). April 4, 2017

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Below is an excerpt from today’s Sevens Report. Cut through the noise and understand what’s truly driving markets, as this new political and economic reality evolves—start your free two-week trial today. 

Economic data was the major influence on markets yesterday, and while most of the focus was on the ISM Manufacturing PMI and the Markit manufacturing PMI, (both of which were in line with expectations), the real market mover was the disappointing auto sales report.

Auto Sales Responsible Auto sales fell to 17.0M saar vs. (E) 17.2M saar, and that number joins a growing chorus of caution signs on the auto industry, including fears about used car pricing and used car debt.

Bottom line, auto sales aren’t as popular as the ISM Manufacturing PMI, but the auto industry in the US is massive and very cyclical, and if we are starting to see the beginnings of a pullback in the auto industry that’s not a good sign for the broader economy. That’s why the disappointing auto sales number hit stocks so hard yesterday, even in the face of in-line manufacturing PMIs.

Bigger picture, the “gap” between soft and hard economic data continued to widen yesterday, as the soft PMI survey data was strong while the hard March auto sales data was disappointing. That gap between sentiment/survey data and actual hard economic numbers must be closed sooner rather than later, and it’s a growing risk to stocks.

ISM Manufacturing Index

• The Index fell to 57.2 vs. (E) 57.1

Takeaway

The trend in the manufacturing sector of the economy remains healthy according to the latest release from the ISM. The March ISM Manufacturing Index did edge back for the first time since August, slipping from 57.7 to 57.2 month over month, but the headline was still narrowly ahead of estimates (57.1).

The details of the report were solid as New Orders remained notably strong at 64.5. That was a slight pullback from February’s reading of 65.1; however, it was the second-largest reading in more than three years (after February). New export orders also were at a three-year-plus high of 59.0 while Employment jumped 4.7 points to 58.0, the highest level in almost six years. Rounding out the report’s internals, Prices Paid rose to 70.5, the highest reading since May 2011, underscoring a potential uptick in inflation in the US.

Bottom line, the ISM release showed some slight moderation month over month, but the general trend remains strong which is a positive (although again, this surging survey data needs to start being confirmed by hard economic numbers).

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Last Week and This Week in Economics, April 3, 2017

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“Last Week and This Week in Economics”—an excerpt from today’s Sevens Report: everything you need to know about the markets in your inbox by 7am, in 7 minutes or less.

Last Week

Sevens Report - April 3, 2017 - This Week and Last WeekEconomic data was sparse again last week, but what data did come beat expectations (although it didn’t do a lot to bridge the gap between survey-based indicators and hard economic data). Still, the numbers did continue to be enough to offset growing Washington noise.

Consumer confidence was the highlight of the week, and it blew away expectations. The number rose to the highest level since summer 2001, coming in at 125.6 vs. (E) 113.8. While a strong number, that is another sentiment survey, and these soaring sentiment surveys need to start reflecting in the hard data starting in Q2 (remember, Q1 GDP is still expected to be around 1%).

The other notable number last week was Pending Home Sales, which also beat estimates, rising 5.5% vs. (E) 2.5%. The biggest takeaway from the March housing data is that it appears higher mortgage rates are not hurting the residential housing market, and that’s an important but underappreciated tailwind on the economy, generally speaking. Going forward, a stable housing market remains critical if there’s any hope to seeing a material economic acceleration.

Bottom line, the last two weeks have been light on economic data, but what numbers we’ve got have generally been good, and as a broad statement the economic data has continued to offset lack of progress in Washington… but that trend will be put to the test this week.

This Week

After two quiet weeks of economic releases, we more than make up for it this week, as the three most-important economic releases of the month all come over the next five days. From a broader context standpoint, with Washington stuck in neutral and hopes of big tax reform fading, economic data needs to stay firm to support stocks. If the data disappoints this week, don’t be surprised if we test last week’s lows.

The most important release this week is Friday’s jobs report. We will do our typical “Jobs Report Preview” later this week, but again it’s important this number is Goldilocks, in that it’s strong enough to support the market, but not so strong that it makes a May rate hike more likely.

The next most-important release this week is the global manufacturing PMIs (out today). The European and Asian numbers have already been released, and focus now turns to the March ISM Manufacturing PMI at 10 a.m. today. This number is taking on a bit more significance due to the disappointment of the flash manufacturing PMI of two weeks ago. It hit a surprise six-month low, so markets will want to see the ISM Manufacturing PMI refute that reading.

The manufacturing PMI is followed by the global manufacturing PMIs out Tuesday night/Wednesday morning. Those reports will again potentially confirm the uptick in global growth, and especially in Europe, where numbers have been strong lately. Domestically, it’s the same story. Economic data needs to support this market in the face of disappointment from Washington. Failure to do that puts this rally at risk.

The only other notable event this week will be the ECB minutes. If the minutes read hawkish, that could put a temporary headwind on HEDJ and long Europe positions. But a dip will likely be a buying opportunity in HEDJ.

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Last Week and This Week in Economics, March 27, 2017

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“Last Week and This Week in Economics”—an excerpt from today’s Sevens Report: everything you need to know about the markets in your inbox by 7am, in 7 minutes or less.

For all of 2017, better-than-expected economic data has helped to offset the decreased likelihood of pro-growth policies from Washington, and that continued last week as what little economic data we did receive was generally supportive for stocks.

The Sevens Report, March 27, 2017Looking at Durable Goods, longer-term readers know we ignore the headline and look straight for New Orders for Non-Defense Capital Goods ex-Aircraft (NDCGXA). That is the better measure of business spending, as the headline Durable Goods order is massively skewed by the timing of aircraft orders.

NDCGXA missed estimates in the Feb. report (-0.1% vs. (E) 0.5%), but the January data was revised higher (from -0.4% to 0.1%). So, that largely offsets the miss in February.

The March flash manufacturing PMI was a disappointment, as it missed estimates and hit a surprise six-month low at 53.2 vs. (E) 54.3. But while disappointing, the flash PMI forecasted weakness in February that didn’t appear in other national manufacturing PMIs, and even at 53.2, that’s still a decent absolute number (remember, anything above 50 shows activity accelerating). Point being, that one number doesn’t suggest a loss of momentum.

Looking at other data, February Existing Home Sales slightly missed estimates but February New Home Sales beat estimates. But, with housing it’s helpful to step back from the monthly data and observe the overarching trend, and that trend is stability. All the housing data confirms that so far. Higher mortgage rates are now causing a noticeable slowdown in the housing recovery, and that remains key un-sung support for the economy.

Turning to the Fed, there were multiple speakers last week, but the headliner was Fed Chair Yellen, who made no comments about the economy or policy during her speech. Other Fed members were on balance slightly hawkish, as many of them referenced hiking three or four times this year, but none of it was impactful enough to reverse the dollar or Treasury yield decline we’ve seen since the Fed’s dovish hike in March. Markets still have a June rate hike at about a 50/50 proposition, unchanged from last week.

Bottom line, all the focus was on politics last week, but economic data remains the unsung hero of 2017, and it continues to help offset growing policy headwinds via Washington.

This Week

This week will be another relatively quiet week from an economic standpoint, and once again the most important number won’t come until Friday.

That number is the Core PCE Price Index contained in the Personal Income and Outlays report. That’s important because it’s the Fed’s preferred measure of inflation, and if the headline PCE Price Index breaks through 2.0% yoy (last 1.9%), and the Core PCE Price Index moves further towards 2.0% (last 1.7%), that may elicit a slightly hawkish reaction in markets.

Internationally, there are two notable reports to watch. First, Chinese Manufacturing PMI hits Thursday night, and while China remains on the back burner from a macro standpoint, any signs of economic slowing will surprise markets. Second, EMU Flash HICP (their CPI) comes Friday. The best outcome for European stocks is a Goldilocks number, where core inflation doesn’t rise much from the current 0.9% yoy pace, and as such doesn’t make the ECB think about ending QE prematurely. A Goldilocks number will be positive for European ETFs (HEDJ, VGK, EZU).

Bottom line, this will be another quiet week from a data standpoint, but the numbers need to confirm the acceleration of growth to continue to support stocks. From a risk standpoint, too-strong HICP or Core PCE numbers are the events to watch (they might make the Fed and ECB lean more hawkish).

Politically, there will be a lot of analysis on the shift towards tax cuts (we’ll do a primer this week), but nothing truly important is scheduled. Finally, on the international front, British PM May will formally trigger Article 50 to begin the Brexit process (although that shouldn’t cause much volatility).

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A Potential Warning Sign from Dow Theory, March 22, 2017

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An excerpt from today’s Sevens Report (the Sevens Report is everything you need to know about the markets, in your inbox by 7AM in 7 minutes or less).

The price action this week has made us more cautious on this market from a technical standpoint (we’ve been cautiously positive fundamentally for some time). And the reason for the caution has to due with Dow Theory.

The Dow Transports are poised to print a bearish “lower low” on the weekly chart (depending on how things play out through Friday’s close). In a nutshell, the Transports plunged through their most-recent weekly closing low at 9043.90 yesterday. The “lower low” would be the first signal of the four needed to turn our interpretation of Dow Theory bearish.

As a reminder, the last time we published that Dow Theory had turned bearish was in July 2015, just weeks be-fore the Dow Industrials and S&P 500 fell 1000 points and 100 points, respectively, in the opening minutes of trade due to Chinese currency turmoil. While Dow Theory was bearish, stocks fell nearly 15% before recovering after the election and turning back bullish. Our signals did miss out on a modest 3% upside gain (most of which took place in the back half of election week, before the signal was offered).

Bottom line, Dow Theory remains positive for now; however, the Transports did just flash a warn-ing sign. And while we still believe the path of least resistance, based on technicals, is higher for now, we are monitoring the technical situation carefully to keep you informed of another potential period of volatility.

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The Case for Europe, March 21, 2017

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Sevens Report - The Case for EuropeThe Case for Europe, an excerpt from today’s full Sevens Report. Join hundreds of advisors from huge brokerage firms like Morgan Stanley, Merrill Lynch, Wells Fargo Advisors, Raymond James and more… see if The Sevens Report is right for you with a free trial.

For the past several weeks, I’ve been consistently mentioning Europe as an attractive tactical investment idea. Today, I wanted to more fully lay out the investment thesis, one that is based on 1) Compelling relative valuation, 2) Continued central bank support (i.e. QE), and 3) Overestimation of political risks.

I believe those three factors have created an attractive medium-term risk/reward opportunity in European stocks, and I believe the region can outperform the US over the coming months, especially if we see policy disappointment from Washington.

Bullish Factor #1: Compelling Relative Valuation.

The reasoning here is simple. The S&P 500 is trading at the top end of historical valuations: 18.25X 2017 EPS, and 17.75X 2018 EPS. There’s not much room for those multiples to go higher, and if we get policy disappointment or the economic data loses momentum, markets could hit a nasty air pocket.

Conversely, the MSCI Europe Index is trading at 15.1X 2017 earnings, and 13.8X 2018 earnings. That’s a 17% and 22% discount to the US. So while it’s true Europe should trade at a lower multiple vs. the US given the still-slow growth and political issues, those discounts are pretty compelling. In a world where most equity indices and sectors are fully valued, Europe offers value.

Bullish Factor #2: Ongoing Central Bank Support.

This one also is pretty simple… the ECB is still doing QE. The ECB is still planning to buy 60 billion euros worth of bonds through December of this year. That will support the economy, help earnings and push inflation higher, all of which are positive for stocks. Now, there is a risk that the ECB could begin to taper its QE program before December, or end it all together in December, but neither risk looms immediately, and the much more likely result is that the ECB tapers QE starting in 2018 and ends the program in June 2018. In that scenario, the outlook for Europe over the coming months remains positive.

Bullish Factor #3: Overblown political risk.

We’ve been talking about this for a while, but the fact is that political risks in Europe are overblown, and just like people underappreciated risks in 2016, I believe they are now overreacting to Brexit and Trump by extrapolating those results too far.

Going forward, there are really two important elections this year: France and Germany. The worry is that far-right candidate Marine Le Pen will win the presidency, but that remains extremely unlikely. The top end of her support looks to be just 25%, which might be enough to win the first round of voting (where voters will cast ballots for no less than 11 candidates). Yet according to all the polling, she badly loses the second round of voting by margins as big as 30% to 70%. Point being, Le Pen is not Brexit, and she’s not Trump.

Second, Germany will have elections in September, and Social Democrat leader Martin Schulz will challenge Merkel for the Prime Minster position. Schultz is a former President of the European Parliament, and he’s not anti EU at all. So, if he wins, from an EU outlook standpoint, it isn’t a negative. Now, I’m not going to get into the details of his politics, because they aren’t yet important for this investment. The bigger point is that it’s not really a problem for the European economy if Schultz wins. Bottom line, we’ve done well in international investments in the past (Japan during Abenomics, Europe when they started QE), and we believe this is another opportunity to outperform.

How to Play It: VGK vs. EZU vs. HEDJ. For subscribers only.

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Economics, This Week and Last Week, March 20, 2017

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Every Monday in the Sevens Report, you’ll find a review of last week and a preview of this week. Sign up for your free trial today and start each week “sevens strong.”

Sevens Report - Last Week and This WeekLast week was generally “Goldilocks” from an economic data and Fed standpoint, as economic data continued to be buoyant while the Fed successfully executed a dovish hike (at least in the short term).

Starting with the Fed, the FOMC hiked interest rates 25 bps, as expected, but left the dot projections for 2017 and 2018 unchanged at three hikes each. Given market expectations for an increase in the dots, the reaction was immediately dovish (stocks up, bonds up, gold up, dollar down).

As we said last week, it’s important to see the forest for the trees. Regardless of the Fed’s projections, the first hike of 2017 came three months earlier than expected, and the question going forward isn’t whether the Fed hikes again, but “when” and “how often.”

If inflation data keeps rising and economic activity accelerates (or we actually get corporate tax cuts) the answers to those rate hike questions will be “soon,” and “more than three times.” Point being, don’t confuse the short-term dovish reaction with a reduction in risk from a hawkish Fed throughout 2017. The risk hasn’t changed.

Looking at the economic data last week, it showed an ongoing “reflation trade,” as inflation and growth data beat estimates. Both February PPI and CPI ran a touch “hot,” and showed either bigger-than-expected monthly increases (PPI) or year-over-year price increases that were the biggest in several years (headline CPI rising by 2.7%).

Meanwhile, the first economic data points from March, Empire Manufacturing and Philly Fed, also both beat expectations. Philly was 32.8 vs. (E) 30.0 and New Orders, the leading indicator of the report, rose to 38.6, which is the highest since 1983!

Actual “hard” economic data last week was a touch disappointing on the headline as Retail Sales met expectations and the “Control” group (the best measure of discretionary consumer spending) rose just 0.1% vs. (E) 0.3%. Revisions to the January data were positive and offset the disappointment, though (January control retail sales were revised to 0.8% from 0.4%).

It was a similar result with February Industrial Production being flat vs. (E) 0.2%. However, January data was revised slightly better to -0.1% vs. -0.3%. Meanwhile, the manufacturing sub-index was more positive (up 0.5% vs. (E) 0.4% and January was revised to 0.5% from 0.2%).

Bottom line, the “hard” economic data continues to lag the “soft” sentiment data (i.e. Philly/Empire Surveys) and the running estimate for Q1 GDP (the Atlanta Fed’s GDP Now) is just 0.9%, the lowest in nearly a year.

Again, it’s not an indictment of the rally just yet, but at some point, that GDP number needs to start to rise to meet the surging survey data, otherwise we’ve got a problem.

This Week: Economically speaking this will be a generally quiet week, as the notable data doesn’t come until Friday via the global flash PMIs and February Durable Goods report.

Yet despite the small number of reports, the data is still important, because it has got to continue to help support stocks in the face of ever-dimming policy prospects. So, those numbers (especially durable goods) need to continue to imply economic acceleration.

Other data to watch this week includes housing data (New Homes Sales Wednesday and Existing Home Sales Thursday), but generally housing continues to hold up well in the face of generally higher rates.

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How Does Trump’s Approval Rating Impact The Stock Market? March 8, 2017

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Leading Indicator Update: Showing Signs of Fatigue

An excerpt from today’s Sevens Report… Skip the jargon, arcane details and drab statistics, and get the simple analysis that will improve your performance.

At the start of the year, I said that beyond the normal economic data and fund flow data, we’ll be watching two other specific leading indicators:

  • Trump’s approval rating, and the
  • Semiconductor Index.

As a refresher, we watch Trump’s approval rating because it is an imperfect, but still effective, measure of political capital.

Earlier this year, we said that if his approval rating dips in the weeks and months following Inauguration Day, that won’t be a positive sign for corporate tax cuts (i.e. it will be stock negative). Conversely, if his approval ratings rise following his inauguration, the chances of tax reform will rise (i.e. it will be stock positive).

Turning to the Semiconductor Index (see chart on Pg. 1), we view semiconductors as a destination for incremental capital that comes off the sidelines or out of bonds.

It’s our proxy for money flows, or “chasing” into the US markets.

That reasoning here is based on watching the price action in semis and observing that they handily outperformed post election (implying they were a destination for capital coming off the sidelines), and we continue to believe that is the case.

LI #1: Trump’s Approval Rating Updated. The outlook here hasn’t been that positive, and the movement in the approval rating anecdotally confirms our opinion that the market remains too optimistic regarding corporate tax cuts in 2017.

Why is the president’s approval rating a leading indicator?

From a broad standpoint, Trump’s approve/disapprove gap has gotten worse since the inauguration, and we think that represents a slight erosion of political capital.

Last week, we saw a slight bounce following his speech to Congress, but the numbers look to be rolling over again.

I am particularly focused on his raw approval rating numbers (as opposed to just the spread between approve/disapprove). So, while the spread between approve/disapprove has gotten worse, the reason this leading indicator isn’t flashing negative for me is because Trump’s raw approval rating is still about the same as it’s been since the inauguration (about 44%).

However, if that raw number were to drop below 40%, I would view that as a material negative for pro-growth policies… and a potential negative for stocks.

LI #2: Semiconductor Index Updated. The Philadelphia Semiconductor Index, our loose proxy for incremental money flows out of bonds/other assets and into stocks, has until recently confirmed the 2017 rally.

The SOX rallied 9% from the first of the year till February 22, at which point the index stalled, and it’s traded side-way for nearly two weeks.

Going forward, support at 955.11 now is an important level to watch, as a break of that level would constitute a “lower low” on the charts.

Below that, support at the 20-day moving average at 947.25 has supported this index three times over the past few months. So, that also will be an important level to watch.

Bottom Line

Neither of these leading indicators have sent a non-confirmation signal of the rally at this point. Yet after confirming the rally earlier this year, both of these leading indicators are starting to wobble.

Again, we’ll be watching 40 in Trump’s approval rating and 955 and 947 in the SOX. If those levels are broken that will likely prompt us to become more defensive near term for stocks.

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