Analysis: MU LMT FDX

We've finally made it to the end of September, and the bulls have stumbled to the finish line. Economic data has shown the US economy is pulling back sharply. The earnings call from Micron Technology (MU) Thursday night indicated it saw a big slowdown in demand from the consumer after FedEx (FDX) recently stated the same along with citing severe supply constraints plus a higher cost structure. These problems are not isolated to these companies and foretell a challenging period ahead for US businesses. Couple that with higher tax rates expected in the years ahead and the ingredients are there for lower earnings and stock prices.

Bond yields rose sharply to start the week but backed off significantly following the bond/currency intervention by the Bank of England on Wednesday. There is plenty of confusion and worry to go around with this move, and likely more to come from other countries as the strong dollar wreaks havoc. The 10-year Treasury yield nearly hit 4% this week, while mortgages rose and tagged 7% for the first time in many years. With high and persistent inflation along with a Fed reducing its balance sheet we can expect yields to rise further, but not all that much more. Why is that? Because there is still a demand for Treasuries, and as those prices come down buyers will snap them up to have an improved yield and return (bond prices go up, yields go down -- but if you bought early before prices rise you have a better return opportunity).

The technical picture is a hot mess. The S&P 500 breaking through the 3,700 level this week and holding there is not a positive. Wednesday had a solid rally and the statistics were solid, yet volume trends were poor and due to a lack of conviction that day the sellers came out in droves Thursday and eliminated the entire gain, and then some. We had a deep oversold condition after the close on Tuesday, one of the lowest oscillator readings ever, so a rally back was not a surprise (pull the rubber band back far enough and then release it).

GDPNow is looking for nearly a flat GDP for the third quarter. Today we had the release of the very important Personal Consumption Expenditures (PCE) numbers, which include inflation data to which the Fed pays very close attention. The estimate was for 0.2% increase month over month, but 6.1% price index growth year over year. The actual numbers were hotter than expected, with the deflator up 6.2% and core deflator up 4.9% year over year, while the monthly numbers came in at 0.3% and 0.6%, respectively. All these numbers were greater than expected and re-emphasize the aggressive Fed action needed to quell inflation. In addition, consumer sentiment and final Chicago PMI are out this morning.

Remember, a market in distribution is the current situation. As we have a hoard of cash, inverse ETFs and some defensive names (such as our new position in Lockheed Martin (LMT) from Thursday), we continue to be cautious and we suggest the same for you. Earnings season will begin soon and we do not believe all the bad news is priced into stocks.

At the time of publication, Action Alerts PLUS was long LMT.