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Friday, September 2, 2016

Daily update 9/2 More on lack of recession worry

I guess we don't know more about Sept. after the employment report after all.

SPX ended the day right at the 20 SMA and my yellow line.  Breadth was a very strong +74% and was strong all day.  Despite that strength SPY closed with a doji bar just slightly below the open.  That looks like more nibbling by investors on a lot of stocks.  Last month's employment report is what got SPX up above its late July trading range.  No such luck today.  While the market was up it ended will below the 2193 high.  If that did not get us going up what will?  Earnings season is already over.  Good economic data could be met with rate hike expectations increasing and a pullback in stocks.  Weak data might not help as we are in an earnings recession already.  I don't have a clue what will propel SPX higher with valuations already sky high.

The futures lifted from the 100 SMA once again.  However, they found their high for the day early on.  They also made new lows for the day in the afternoon once again.  The intraday bearish price action continues even if price is not falling.  That is not typical action in a bullish consolidation, but I can't recall ever seeing it when price was not actually falling.  It is common to bounce from the first high -DI reading.  The question is whether we make new highs or roll over.  A roll over after that high -DI reading should lead to a bigger pullback now.

The green line crossed above once again.  The braided consolidation pattern continues.  The cross above 50 by the red line brought out a few buyers, but the market did not really thrust up like it should have.  The market is looking a little precarious.  If the buyers don't show up next week a pullback to the key 2130-35 area seems likely.

Everybody should be back from the beach next week.  The volume will pick up.  It remains to be seen if the volatility picks up as well.  Will they be in a buying or selling mood?

I think I have a couple of ideas of why there are no recession worries of late.  The first and foremost is the belief that recessions do not  happen without an inverted yield curve.  While the various yield curves have flattened none have inverted yet.  However, with the FED's ZIRP or at least extremely low interest rate policy I would not expect an inverted yield curve.  Japan has been in and out of recessions for over 20 years without an inverted yield curve.  Prior to WWII the U.S. also experienced recessions without the famed inverted curve.  I think this belief will be proven wrong.

Another source of disbelief might be the leading economic indicators.  Here is a look at ECRI's WLI.

This indicator has rocketed up since the Feb. low.  In fact it is in new high ground for this recovery.  After watching this one and other versions such as the LEI doing this for several months I was expecting a true surge in the economy.  There has been a slight pickup in activity, but no surge.  Other then stocks I am not exactly sure what has been driving this index up of late.  Commodity prices surged off the Feb. low along with stocks, but stopped rising months ago.  The transports are not showing any sign of a pickup in economic activity either.  What gives?

Obviously nobody knows how this will play out.  I am watching the data for signs of a meaningful pickup in activity, but I just can't see it yet.  The GDP and employment data is useless in real time even though many people talk about them.  During earnings season we had a number of companies saying that there had been a fall off in restaurant and store traffic.  Now we got a big drop off in auto sales.  Those things are more consistent with a weakening economy rather then one gaining strength.  I can't really reconcile what SPX and the WLI are saying about the economy and what the hard, reliable data is saying.  It doesn't make any sense.  Either SPX is going to fall back to earth or there is going to be a true sustainable pickup in economic activity.  Which will it be?

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


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