General
Major averages tried to climb higher in Wednesday's trade but on lower volume, digesting recent gains. This rally attempt is sponsored by quantitative easing as strong leadership seems absent. Small caps continue to lag as worries over the world economies continue. Indeed, larger caps are the safer bets during times of economic uncertainty since such companies are more stable and can better withstand economic setbacks as witnessed by the continued underperformance of Russell 2000-related ETFs such as 1-times IWM and 3-times TNA relative to ETFs such as 1-times QQQ, 3-times TQQQ, and 3-times TECL (formerly TYH).
Further evidence of economic sluggishness manifested again, this time in China, where its consumer-price index rose 1.8% in July from the year-ago period, the slowest increase since January 2010, and a slowdown from June’s 2.2% pace. The monthly producer-price index also dropped 2.9% versus a year earlier after a 2.1% drop in June. This weak data further strengthens the case for more fiscal stimulus from Beijing.
Growth continues to slow globally and while the market's rally demands a degree of respect many remain distrustful of the move's ostensible underpinnings. Europe has announced many "solutions" over recent years but none have stemmed the tide's movement towards insolvency. Why should this time be any different? Meanwhile, as the numbers out of China as well as the earnings announcements of economically-sensitive stocks like McDonald's (MCD) and Priceline.com (PCLN) over the past two days point to continuing economic deceleration. Meanwhile, stocks are only levitating in anticipation of a Fed QE3 or an ECB QE that either won't come or will prove to be ineffectual. Investors are being "forced" into the market by its persistent strength and every tick higher has a "painful" feel to it.
Stocks
Yet another former leader gapped down after issuing a disappointing earnigs report. Monster Beverage (MNST) gapped down about 13% in post-market trading on Wednesday after it reported it had missed both earnings and revenue estimates. In pre-market trade Apple (AAPL) has moved below the 619.87 breakout point through which it moved above last week, but the lack of volume buying on that move is beginning to show its effects as the stock drifts back into its prior consolidation.
The pattern of continuing deterioration in what have been former big-stock leaders has characterized this recent move by the market indexes to higher-highs in the rally that began in early June, and without expanding leadership the rally remains suspect. Our view is that investors should keep their powder dry in what remains an uncertain, highly news-driven rally with little in the way of nascent, emerging leadership.