-- Posted Monday, 12 July 2004 | Digg This Article
Stocks fell last week as the major indices put in new 1-1/2 month lows. The Dollar Index broke down as well, skidding to a new 3-1/2 month low while gold rocketed through the $400 level. Crude oil, forecast to continue falling by the same “experts” who forecast a post-Iraq invasion price of $25 and obviously got it all wrong yet again, revisited the $40 level.
Last week saw the S&P 500 break decisively below its recent narrow congestion pattern, making it clear that new “bull market” highs are likely not in the cards. In fact, what has become increasingly likely is a test of the mid-May low around 1076.
Earlier this year in these pages we discussed a bearish divergence between the action in the Nasdaq Composite and the broader market. The techs failed to confirm highs in the other indices, our first indication that something was going more than a little awry. A classic Dow Theory divergence between the Industrials and Transports added some fuel to the bears’ fire. And ever since, the market has done nothing to diminish the relevance of these important divergences.
In fact, the technical case for further declines grows more solid with each passing week. For all three major indices broad patterns of progressively lower highs and lower lows remain intact. A quick gander at an S&P chart reveals one very obvious point: every rally this year has stalled at lower levels. In other words, bulls have consistently failed to challenge previous highs while sellers have happily accepted lower prices for their inventory.
While the market has yet to put in a decisive top and shift to official bear mode, (we’re still technically in a trading range that could eventually go either way) it’s clear that a subtle shift from the bulls to the bears is in progress.
Not terribly surprisingly, the economic data has also begun to shift, albeit far less subtly. Recent reports revealed tremendously disappointing number from Detroit’s automakers. Even amazing incentives and 0% financing are no longer enough to convince the American consumer that yes, there truly is something you can do with five SUVs that just can’t be done with four.
As our astute readership is undoubtedly already painfully aware, the Chicago Purchasing Managers’ data was also horrendous: production down from 71.1 to 53.9, while the new orders number plunged from 74.4 to 56.8. All this against the backdrop of rising inflation as the prices paid component climbed 4.5 points to 84.5.
The June employment data was equally horrendous. The 112,000 jobs fell somewhat short of the expected quarter of a million. Somewhat. Naturally the mainstream financial folks aren’t worried. As always, one month of good data is the beginning of a trend, but one month of bad data is simply an aberration. So relax.
Helluva recovery, isn’t it? Mr. Market, ever the strong silent type, whispered it to us earlier in the year but so few of the dingbat bubbleheads of the financial press could break away from their incestuous love affairs with one another’s’ voices to hear his quiet message: “I’m not going any higher. Have you noticed? There’s a reason for that. Perhaps you can guess what it is?”
Even Walmart disappointed. Think about that: the only place in this country where you can (legally) walk out with a huge bag of stuff for less than $20 and even they couldn’t entice the public to do away with enough Jacksons to post decent earnings. Something is clearly very very wrong with this miracle economy “on course for the best rate of growth in 20 years.”
That’s right. The “experts” are at it again, forecasting great GDP numbers for 2004 even while the man in the street continually sniffs under his armpits seeking the noticeably absent aroma of good hard day’s work. How can this be so? Are the numbers being falsified?
I wouldn’t go that far (not publicly anyway) but the way the numbers are (mis)calculated helps to answer the question. As Craig Harris if www.harriscapitalmanagement.com has discussed, the GDP calculation uses the inflation data to arrive at its conclusions. When the inflation data is sorely understated guess what happens to the GDP number? That’s right: it ends up overstated. Voila! Another official figure that has to be taken with a large grain of salt.
How does one make sense of it all when so much of the data is laden with flaws and statistical massagery? You don’t. The market will tell you all you need to know. Do we need to analyze the data to figure out how strong or weak it is? No, just look at the market which hasn’t made a new high since March, even while the data was coming out better than ever.
Now we find ourselves back in the quarterly ritual of examining earnings data to figure out where things are headed. Do we even need to look at the data? Why bother? Take a look at the market: No new highs, progressively lower highs and lower lows on the three major indices. The numbers coming out this week and next have already been forecast and they don’t look good. If they were going to be good, the S&P 500 wouldn’t be trading at the same level it was four months ago.
But as I’ve been saying for quite a while now, don’t assume that bad numbers will rejuvenate the long-term bear market right away. We’re only a few months away from the election and Uncle Al, aggressive inflation fighter that he is, is obviously playing ball, evidenced by a silly token 25 bp rate cut. If there’s a way to keep the market “stable” (read: “keep it from falling”), the fine folks at the Fed will find it.
In the meantime, folks at the White House are already in the process of “securing” the election by examining ways to avoid one entirely. (http://www.msnbc.msn.com/id/5411741/site/newsweek/) With that kind of gumption and creativity, how hard can it be to keep stocks propped up a few more months?
-- Posted Monday, 12 July 2004 | Digg This Article
