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Thursday, March 19, 2015

Daily update 3/19 Debt vs Growth

The March pattern of no back to back up days in SPX played out again today.  QQQ, IWM and IYT ETFs all showed relative strength to SPY all day, but the market just could not get going up.  That is a bit unusual. While small caps can outperform big caps on the upside at times, the general direction the market goes is set by the big caps.  If SPX continues to show real weakness IWM will eventually follow it.

SPX managed another close above the 18 SMA.  However, we did not get the confirmation to yesterdays upside break.  Breadth was -63% which is considerably negative with several key indexes slightly positive on the day.  New highs saw a big drop down to 139.  New lows also saw a drop to 36.  This market has had no trouble stringing back to back up days together for several years.  In fact we have had 6-7 day streaks quite often.  Something is different at least for now.

The futures gapped down again for the third day in a row.  That is starting to look like a pattern developing with price starting to fall on the European open.  Are they pulling money out of the U.S. and taking it back to Europe for the ECB QE?  I theorized a couple of months ago we could see that.  If it keeps happening would it put a damper on the dip buyers spirits?  For today the upper Keltner channel held as resistance.  Have we started the FED induced rally retrace already without ever trying to go higher?  

While we are in a short term uptrend with price, all the breadth indicators are negative.  It might not take much to get the market going down in earnest once again.

Will the bears come out again tomorrow or will the bulls show up with some vigor?  I suspect if see downside follow through tomorrow and SPX closes below the 18 DMA the bounce is in trouble and a return to the lows is probable.  The bulls need to get SPX above yesterday's high and keep it there.  I think the power is up for grabs here.  Which side reaches out and takes it?

I have seen a number of ways to show that economic growth is getting less and less for every dollar of new debt.  I think this chart makes it the most obvious.

Debt needs to be serviced and at some point the cost to service the outstanding debt can become more then the economy can bare.  I don't see any de-leveraging in this chart do you?  Now take a look at GDP over the same time frame.

It is pretty clear that growth has been decelerating since the 70s which is the same time that debt really started to take off (I know correlation does not mean causation, but there is so much academic research that shows that debt hurts growth).  Despite all the heroics from the FED growth is slowing.  I contend it will never really get better until we deal with the debt.  I don't understand why central banks and government officials don't get it.  This is a global problem.  The current solution seems to be for everybody to devalue their currency.  The experience from the 20s and 30s indicates that the only result from currency wars is overall reduced trade.  That of course only makes the debt problem worse.  Which leads to more currency devaluations.  Which leads to ...  I am sure you get the picture.  This method of operation has been tried before and led to the great depression.  Can we somehow get our leaders to take a different approach?


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