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Wednesday, April 29, 2015

Daily updatre 4/29 The economy is different this time

The FED announcement created a little volatility, but not much.  The dip buyers did their thing several times today, but they could not get a positive close.

Volume increased considerably today so there was participation.  In the end the bears won out.  The breadth was -65%.  The new highs dropped down to 55.  New lows picked up to 26.  Crossing the 25 threshold is a caution flag.  The 18 SMA held once again.  Will it hold a third time if tested?

The futures are now below the blue potential support line.  That indicates the last break out to a slight new high was a failure.  Price is currently below the 18 SMA, but we still don't have confirmation of a break.  The MACD is getting close to giving a sell signal that would confirm the negative DI cross.  You can see plenty of lower tails indicating the bulls are trying to hold the market up.  Will they be successful?

The 10 DMA breadth lines got a  negative crossover for the first time since back in March.  The McClellan oscillator is also negative.  It has oscillated back and forth several times over the last few weeks.  The breadth data would seem to confirm the key reversal day as having at least some importance.  Will the bears pounce on the weakened market condition?

While the dip buyers are active the market is getting weaker.  If tomorrow is down we should be in pullback mode.  I think SPX needs to close above 2120 to try to clear the air.  On the downside the first key support is the 100 SMA at 2068.  The 50 DMA has been almost totally irrelevant the last couple of years.  I don't think I would plan on it being support here.  I have my doubts the 100 will hold for long if we head south.  The overall technical condition is extremely weak.

The first quarter last year ended up with a GDP of -2.1%.  There was definitely some soft data, but this year is different.  The last few months I have spent quite a bit of time studying past economic data.  I noticed that recessions can manifest themselves in considerable different ways.  That is what makes it hard to identify them.  I have found some pieces of data that don't suffer from as large of revisions as the GDP and employment data do.  Those are actually very poor data series to use to understand what is going on in the economy.  I find it odd that so many economists write about them like they are important.  Nothing could be further from the truth.  However, I have come up with some data that is usually only slightly revised and yet taken together do paint a decent picture of what is going on.  Looking over the last 50 years of data it would appear that the best early warning sign of trouble is the ECRI WLIg (weekly leading indicator growth rate).  There is no need to watch anything until it drops to -4.  That is not a sign of going into a recession, just a sign it is time to pay attention to the data.  That happened back in Dec.   The stock market is a part of the this indicator which means a 10% pullback in stocks can send the WLIg pretty negative.  That makes it a bit tough in those circumstances.  However, when it drops negative like it did this time with stocks at their highs it is often a much more ominous signal.  Industrial production, retail sales, and factory orders have all been falling for months.  Business and wholesale inventories have risen significantly the last few months as I have shown on the blog.   Despite the economic scares in 2011 and 2012 we have not had this combination of things all going on at the same time.  We are now into 6-7 months of softening data in most of these data series.  If things don't start turning around pretty soon a recession is going to be hard to avoid.  With building inventory and soft sales there could be downward pressure on the manufacturing data this quarter.  We do not appear to be in a recession yet, but we seem to be weak enough that we could be in the next few months.  Will retail sales continue to be soft?  I think the consumer is the best chance to cause a pick up in the economy.  Recently consumer confidence appears to be weakening some also. 

I warned last year that the negative effects of the drop in oil would happen up front while any positive effect on consumers would take a while.  So far that appears to be what is happening.  The savings on energy is going into paying off debt and rebuilding savings instead of splurging.  Last year when the weather warmed up consumers went on a spending binge.  That does not appear to be happening at least so far this year.  It looks to me like we are at the highest risk of a recession since this recovery began.  I will be paying close attention for now to the data.

R2000 made the lowest close in the last month turning its short term trend down.


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