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Friday, May 15, 2015

Daily update 5/15 Industrial production (IP)

That was not the most exciting expiration day I have ever seen.  Perfect indecision.  SPY had a perfect doji closing exactly on the open to the penny.  You don't see that very often.

SPX did not get up to test the all time intrday high.  The sellers showed up right on the opening gap up.  Like other days they were not aggressive.  As soon as price started to cave they eased off.  The bulls were able to hold the market up the rest of the day, but that is about all.  Once again there was no follow through to yesterday's strength.  Volume was actually lighter then yesterday if this data is correct.  I see SPY traded 20 million shares less then yesterday so I have no reason to doubt it.  Now that is odd.  Usually expiration day is the heaviest volume day of the month.  To be less then the day before is unheard of.  Are people losing interest due to the long trading range?  The weekly chart has a third hanging man bar in a row.  The story remains the same.  People rush in to buy the dip, but there are  no rally chasers around at the highs.  New highs were a measly 96.  No sign of break out players piling in. 

No confirmed break out of the Keltner channel today.  ADX is still falling.  On a break out move I would think it would be much better to have a rising ADX.  This is the fourth trip above the red line.  Will it stay there this time or not?  Break outs over triple tops usually lead to big moves.  They either work and people pile in or they fail and those that had been holding on fold.  I expect we will get a resolution next week.  One of those two scenarios seems nearly guaranteed to happen.

I heard Art Cashin question today if we actually have a break out.  You know my opinion on that.  We do not at this time.  The bulls need to muster up another strong day and clearly get above the range.  Monday's have been bullish all year.  Maybe they get it done.  If we gap up and the sellers show up in force it could be trouble.  The 18 SMA on the futures chart is up to 2103.  I think that is an appropriate bull/bear line for next week.  I think things are about to get more interesting one way or the other.

While studying the economic data available on the internet I noticed industrial production is very important and usually has smaller revisions then many other data series.  That series has data back to 1947 it covers many recessions.  I found recession odds increased dramatically when it falls below its 12 month MA.  At some point in every recession it starts to drop like a rock.  Here is a look at the last 5 years.

One thing I find interesting is the late 2011 period.  The ECRI was out in Sept. claiming a recession was unavoidable.  Notice what the IP did.  It was flying up at the time indicating plenty of strength in the economy.  However, that is not the case now.  It has been falling for 5 months.  A lot of the decline is probably due to the falling rig count in the energy sector.  It is very close to the 12 month MA for the first time in this recovery.  This is a clear sign of weakness that was not present last winter when GDP was very negative.  In Feb. last year IP started flying up again.  That has not happened so far this year.  There is an underlying weakness in IP and retail sales data that has not been present at any time in this recovery.  If the climbing inventories cause a cut back in production it will become evident in this indicator in the months ahead. 

A term we used to hear a lot was economic stall speed.  Historically whenever the U.S. economy had 4 quarters of growth at 2% or less it fell into a recession.  We had that condition one time in this recovery without a recession.   It is clear from looking at IP that the economy was not nearly as weak as the GDP data might have indicated.  However, we have a different situation now.  If the economy slows down to stall speed it is much more likely to fall into recession now.  I think the key going forward is going to be retail sales.  If the consumer continues to be cautious or pullback even further the risk of recession will rise.

The market and sector status pages have been updated.  Have a great weekend all.


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