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Friday, April 15, 2016

Daily update 4/15 Industrial production and ECRI USCIg

Everybody must have been off doing taxes or something.

This is David Elliott's Shanghai duo reversal pattern of a doji bar followed by a hanging man candle.  That would probably be a fitting end to this rally.  If Monday closes below today's low it would confirm the pattern and reversal.  Given the technical divergences I have been showing it could very well happen.  Breadth was slightly positive, but new highs dropped again to 88.  It is not good to see a drop like that and a significant divergence from a couple of weeks ago when we saw over 200.  Since we are right here at the downtrend line we have to take this seriously. 

The green count improved a bit today, but is still negatively divergent.   This is still in a good position for a top.

Both the MCO and the the 10 DMA lines are barely positive.  It won't take much selling to get negative crosses again.

So here we sit just a bit below obvious key resistance at the downtrend line with a reversal pattern.  Lots of technical divergences on top of it.  Call me crazy, but this looks like a pretty good short setup if you are into that kind of thing.  Bears just need to see downside follow through and a close on SPX back below 2075. In Is both Dec. and Jan. down important? I noted that this usually happens in a bear market within a secular bear market.  This is the second year in a row it happened.  That has never happened outside of a prolonged bear market.  Every time it happened stocks went below the first quarter low later in the year.  The VIX dropping below 20 before SPX crossed the 200 DMA is a signal that we should see new lows before the current bear market is over.  The evidence says the odds are high that we will eventually make new lows for the year.  If we turn down here we could be starting on that move.  Next week will be important.

In Daily update 4/8 Wholesale sales I wrote

"Inventories may finally be starting to draw down.  Businesses just kept on ordering despite the buildup for well more then a year.  This will have a negative impact on GDP.  Since sales have not picked up it means businesses are cutting back on orders.  That will negatively impact production which will further hurt the economy.  While so many are saying no chance of recession it looks to me like this is really the time we need to worry.  If sales do not pick up this big of an inventory build could possibly put us into a recession while it gets worked off.  Normally a build like this happens after the recession starts.  I am starting to think it is the build in the inventory that has kept us out of recession so far.  We will find out in the months ahead as it looks like the draw down has probably started."

The latest IP came in with a big drop.

In every recession there is a point where the IP starts dropping precipitously.  It is starting to get that look now.

The YOY look at IP shows it has never been this negative for this long without a recession.

The U.S. coincident index growth rate dropped down to 1.6 this month from 2.1.  Dropping under 2 is a red flag.  This index often gets around 1.5 in the first month of a recession.  It is close enough to be in the danger zone.

Due to data revisions the minimum lag time for detecting a recession would be 3 months.  The data this month has the "look" that a recession may be imminent.  However, next month the data could be revised higher and lessen the risk.  It could also be revised lower and make the odds of an imminent recession even higher.  The risk of recession is considerably higher then in 2011 or 2012.  As you can see in the chart above IP never really even remotely appeared to show a problem in those years.  The IP is a really good data item to look at for judging the direction of the economy.  If it is rising the economy is gaining strength.  If it is falling then the economy is weakening.  The USCIg follows IP directionally as it is a component of it.  Generally the higher the USCIg is the stronger the economy is and the harder it is to go into a recession.  As you can see from the chart above it has been weakening for many months.  I have stated many times in this blog we are on recession watch.  I think I have to upgrade that to a recession warning.  I believe this is about as weak as the economy can get and avoid a recession.  I have noted the build in auto inventories several times.  The latest IP showed a big drop in auto production.  This is likely the end of the inventory build.  I think it is going to be really, really tough for the economy to pick up.  What is going to drive it?  The risk is much higher that more production cuts are coming.  Another key sign would be the national ISM number dropping below 45.  The data reports over the next few months will be very important.

Sorry to drop this on you right before the weekend.  The data is what it is though and now we in a critical time period.

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


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