Tired of Risk (for Now)

Last Update: 26-May-11 09:00 ET

The equity market overcame some initial weakness Wednesday to close the day on the plus side.  It could have been better, but some late selling interest cut into larger gains and the S&P 500 ended the session up 0.3%.

Small-cap stocks outperformed by a wide margin while the defensive-oriented sectors (i.e., consumer staples, utilities, health care and telecom) underperformed.

The complexion of the market of course meant the risk trade was back on.... blah, blah, blah. 

Risk on/risk off... these are such tired expressions, yet we fear we are going to be stuck with this vernacular insomnia all summer since they just won't be put to rest.

Today, it is risk off -- sort of.

The S&P futures were up modestly earlier, aided by better-than-expected earnings results from NetApp (NTAP) and Tiffany &Co. (TIF), and reports that Asian investors, namely China, were showing interest in buying the bailout bonds for Portugal.  The futures listed, however, after a rogue wave of disappointing economic data.

To begin, Q1 GDP was left unchanged at 1.8%.  The Briefing.com consensus estimate called for a slight upward revision to 2.0% growth.  That didn't happen, but since we didn't see a revision below the original estimate, we're only talking headline disappointment here.

The real disappointment was the 10,000 increase in initial claims for the week ending May 21 to 424,000 (Briefing.com consensus 400,000).  Initial claims have been running above 400,000 for several weeks now due in part to special factors; however, the last three weeks have remained above 400,000 without any special factors, according to the Department of Labor.

This is a trend that needs to be watched closely, as it will have a broader economic impact in the form of weak levels of hiring and spending activity if it persists.  On that note, the Personal Income and Spending report for April will be released before the open tomorrow.

The four-week moving average for initial claims dipped by 1,750 to 438,500.

Separately, continuing claims for the week ending May 14 dropped by 46,000 to 3.690 mln.  That was just below the Briefing.com consensus estimate of 3.700 mln, yet the four-week moving average for this series jumped by 7,750 to 3.742 mln.

The S&P futures went negative after the data and are now up less than a point, leaving them just below fair value.  Accordingly, look for a relatively flat start to today's trading.

--Patrick J. O'Hare, Briefing.com

Patrick J. O'Hare is the Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial please email researchsales@briefing.com.

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