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Market Rolling with the Punches


Despite trifecta of bad news, it seems to be shrugging it off.

Editor's Note: This article originally posted on the Buzz & Banter. It's being published here for the benefit of the Minyanville community.

Today's factory-orders data were significantly lower than consensus expected. In this regard, I'd warn readers that it's possible that a disconnect could develop between PMI surveys and actual manufacturing data. Why? PMI surveys can capture the direction of change pretty well. But because of the nature of these surveys, they could prove to be misleading when trying to estimate the magnitude of change. In particular, I believe that after the incredibly depressed conditions in late 2008 and early 2009, the sharply improved readings in the PMIs may significantly "outperform" the actual orders and production data.

I mentioned yesterday on Buzz that for statistical reasons, there was some risk of a disappointment on ADP numbers, and that was the case. Watch for a corresponding disappointment in the Bureau of Labor and Statistics (BLS) numbers later this week -- perhaps even a tad greater.

Finally, I mentioned I was sort of expecting a disappointment in the crude inventory numbers, and this indeed occurred. There was a draw of 372,000 versus an expected draw of 900,000. (I actually thought there was a shot we could have had a build).

So there was a trifecta of disappointing economic data today. But it's the reaction to news that's most important. And so far, the market seems like it's sort of shrugging it off.

I'd remind readers that they should keep their eye on the ball. For me, when it comes to the economy, this means consumer spending. As I pointed out in Solving the Consumer Demand Dilemma and several subsequent articles, the much anticipated "inventory correction" may not be particularly vigorous or sustainable if consumers don't get a hop back in their step. Considering inventories are actually quite high relative to sales, if sales don't perk up, should we really be expecting businesses to deploy precious capital to aggressively restock inventories?

So what are the most recent indications? According to this Wall Street Journal article -- and many others like it published in the past couple of weeks – back-to-school sales haven't been so hot. This doesn't bode well for retail sales for the rest of the year.

I remind readers that I'm not mega-bearish. I see significant scope for the economy being able to resume a self-sustaining growth cycle. This is very much a scenario that could develop, depending on how events proceed. However, in the next few months I see slightly more risk of some disappointments relative to heightened expectations.

The key in this regard is to monitor anything and everything that has to do with consumer-spending patterns. I should point out to readers that I don't buy into the mega-bearish arguments frequently cited about the impossibility of the consumer resuming spending due to too much debt. I also don't buy into the speculations about massive social mood swings that have forever changed consumer habits towards greater thrift.

However, economic trends are made at the margin. And at the margin, the outlook for the consumers on aggregate is difficult enough to make a difference in consumer spending relative to the consensus of economists' expectations.

Regarding my modest SSO short yesterday, I'll probably stop out of it if the S&P 500 moves substantially above the 1,000 level. From a technical point of view, the fact that the market is shrugging off substantial overseas weakness (as I predicted yesterday) and a trifecta of bad data needs to be respected.

I should also point out to readers that I sold all of my DTO position earlier today (for a nice gain) due to the fact that the DXO is apparently going out of business on September 9 due to regulatory issues, and it would be surprising if these very issues don't eventually lead to the demise of DTO.
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