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Thursday, March 3, 2016

Daily update 3/3 Recession risk rising

More up.

There was a strong underlying bid in the market again today.  They pushed prices slightly higher on SPX while the small caps had a very good day.  Of course they were beat up a lot more so that was people looking for value (because they were beat up, not because they were cheap).  The breadth was strong once again at +68%.  New highs expanded to 84.  New lows finally dropped under 10.  The 100 SMA is just 6 points further up.  Remember that strange pattern of pullbacks ending with a close below the  100 SMA.  That was clearly an unnatural act so the market was being manipulated by who knows who.  I am guessing a group of hedge funds.  I have been wondering for months if the same group might start selling at the 100 now that we are in a bear market.  That may be too much to ask for, but it would surely make trading in this bear market a whole lot easier.  SPX has come right up to the bottom of the trading range that formed late last year that we broke down from in Jan.  This is likely to be pretty stiff resistance at least on the first test.  With the market in a very overbought state it could cause some serious selling.

The futures smacked into resistance today.  That line stems from Nov. of last year.  We will see what happens.

Bear market rallies are very strong which causes a lot of confusion in investors.  At least they caused a lot of confusion in me during the last two bear markets.  Now that I have had a chance to study them with many market internals I understand much better how they work.  This is very typical action.  I still believe we will be going to new lows.  This rally is flushing out shorts and sucking in weak longs.  All the market is doing is providing bear fuel.  We had some nice divergences at the lows that provided a comfort for people to buy.  The problem is that none of the things that have caused the market uncertainty have been solved.  With this big move the smart money that bought near the lows have a nice profit in a short amount of time.  They will sell at some point.  That will end up forcing all the late buyers out and the route will be on.  The only question remaining is at what level that happens.  Probably somewhere between here and the 200 DMA.  How far will the bulls take it?

I hear a lot of talk in the media that recession risk is falling.  The fear of recession is receding, but not the risk.  Some of the data is coming in better then expected, but the unusually warm weather is at least partly if not completely responsible.  Here is a new weekly leading indicator that looks quite interesting.

This indicator is getting very negative.  There is only one time in the 45 years of data it got this negative without going into a recession.  That instance happened really close to a prior recession.  I am not sure we can count on that again.  What I especially like about this index was how it handled 2011 and 2012.  ECRI's indicators had them screaming recession.  This index captured the weakness, but did not look recession like.  At any rate this index is telling us we are still on recession watch and the economy is still weakening.  It may already be too late to avoid one now.

Here is an interesting recession probabilities chart.

As you can see recession probabilities are right at the point of no return.  They have never been higher when we did not go into recession.  The only other time they were this high and there was no recession was in 1987.  That of course was the infamous crash of 87.  The economy was very strong before the crash and avoided a recession.  In this case the economy is very weak and has been on a weakening trend for over a year.  It may take a miracle this time to avoid a recession.


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