Reliance Investment Management

After being down as much as 30 points during the week, the S&P 500 rallied on Thursday & Friday and ended the week higher by 2  points at 1,356.

The primary catalyst for the end of the week rally were the earnings from JP Morgan and Wells Fargo which both reported earnings that were higher than what wall street had expected.   These banks  earnings gave a lift to the markets in general as all equity markets finished the week near their highs.

Below is a chart of the S&P 500.  The S&P 500 continues to remain firmly entrenched between it’s overhead resistance at 1,380 and it’s support at 1,308 (it’s 200 day moving average) and a secondary level of support at 1,280.  The sideways consolidation pattern that began in May, 2012 should be resolving itself soon as earnings season kicks into full gear next week with over 200 companies who will be reporting.

(Click on Image of Chart for a Bigger Picture)

It was a slow week on the Economic Front for the release of reports – below are the highlights:

1. NFIB Small Business Indicator (Weaker than expected)
2. Continuing Unemployment Claims (Slightly weaker than expected)
3. Initial Unemployment claims (350,000 – much better than expected)

The Initial Unemployment Claims was reported at 350,000 – this was much better than the expected number of 378,000.  However this report was greeted with a dose of skepticism by much of the investment community who believed that seasonal adjustment factors were the cause of the improvement of initial claims to 350,000.

The most significant economic report released last week was the University of Michigan Consumer Confidence report.  The Consumer Confidence fell to a level of 72.  This is the lowest level of consumer confidence in 2012 as the chart below shows:

(Click on Image of Chart for a Bigger Picture)

While Consumer Confidence is at it’s lowest level of 2012,  the chart shows that in 2011, consumer confidence sank a lot lower down to a 58 level.  So people in the USA are feeling a little better than they were at this time last year – however it is the direction of the confidence level (trending downward) that is concerning.

Where Things Stand

The following bullet points are summary of how we feel the USA and World economic conditions stand at this time.

• Much of Europe is either in a recession or entering one – the economies of the exceptions countries  such as Germany & Finland are are slowing.

• China is definitely slowing – maybe the best (and most reliable)  economic indicator for China is electricity usage and electricity usage has gone down a lot.

• China slowing economy has already impacted the resource producing economies of Australia, Brazil, Canada, Malaysia and the Oil producing states in the Middle East.

• China slowing economy is also impacting the Developed Asian economies such as Korea, Japan & Taiwan who have all seen a big drop in exports to China.

• In the USA – The USA economy has outperformed much of the world for the past 12 months.  However, recent reports such as the purchasing manager indexes for both manufacturing and non-manufacturing shows that the economic growth is slowing.

• For the first time in over 5 years – housing in the USA is making a positive contribution to the USA economic outlook.  Both in jobs and in home price appreciation.  However these improvements are from very low levels of activity.

Forecast for the Next Week

With over 200  companies that are scheduled to report earnings next week that include the likes of Intel, Coke, Google & GE,  we should have a clearer picture on what is the current economic conditions in both the USA and the rest of the world. Also we should expect more volatility in the markets next week.

One year ago in 2011, the markets sold off hard after the second quarter earnings season and did not reach a bottom until October (and 15% lower).  This year though expectations for companies earnings have been reduced much more so than they were last year at this time.

We continue to urge caution to our readers (as we have been doing for the past several weeks).  The Markets are within 5% of their year highs yet much of the world is in a recession, near one or is slowing down.  We continue to think this is an opportune moment for prudent investors to raise cash while the markets are near multi-year highs and while the economic conditions continue to deteriorate.