Market Overbought, But No Sell-Off in Sight

April 04, 2019

The market is bouncing off resistance and is overbought like we have been writing about. However, overbought is a good thing in this case as we do not see a major sell-off happening, just normal back and forth as the market builds up enough steam to break out of this area of resistance. Pullbacks should be viewed as a buying opportunity.

03-06-2019 SPY


The ISM Non-Manufacturing Index (NMI) rebounded 3.0 points in February, the most in over a year, to 59.7 as services activity accelerated markedly. The consensus was for a 0.5-point gain to 57.2. Both new orders and business activity increased at their fastest rates since August 2005, indicating a strong surge in demand. Supplier deliveries continued to slow. Export orders picked up, while imports declined. Employment growth moderated, largely due to the tight labor market. Indeed, of the five commodities that were reported in short supply, four were labor related. Labor was also reported as up in price. Still, overall input price pressures continued to moderate, as the Prices Index fell 5.0 points to 54.4, its lowest reading since June 2017.

The increase in the NMI is in contrast to the decline in the ISM Manufacturing Index. We estimate that the combined latest readings of the two ISM indexes correspond to 2.6% real GDP growth annually, which coincidentally is the same as Q4 real GDP growth. It shows that the expansion has moderated in late 2018 and early 2019, but there is no recession on the near-term horizon.

  • New home sales increased 3.7% in December, to a 621,000 unit annual rate, a seven-month high.
  • The consensus was for a 7.9% drop to 605,000.
  • The previous month was revised down by 58,000 units to a 599,000 unit rate.
  • In fact, sales in the past three months were revised down by a total of 75,000 units, which is equivalent to more than 12% of the sales rate in December, highlighting the volatility and frequent revisions of this data series.
  • On a six-month average basis, new home sales peaked in the spring of 2018, indicating some trend deterioration in 2018.
  • The inventory level rose 3.0% from the previous month to 344,000 units, the highest level in a decade.
  • The months’ available supply edged down to 6.6 from 6.7, indicating plenty of inventory at the current sales pace.
  • The median sales price fell 5.7% on a y/y trend basis, the biggest drop since January 2012. This, along with lower mortgage rates, should boost the affordability and demand for new homes during the approaching spring home buying season.

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