Week in Review, Part I: Global Economics, International and U.S. Equity Markets Overview

[Excerpted from Bill Cara's Week in Review #18, 2009]

One of the defining features of the US equity market over the past several weeks has been the furious sector rotation, with one sector strongly bid from the opening bell, but with no obvious catalyst to fan the bullish flames. On Wednesday the Financials were all the rage, followed by Semiconductors on Thursday, and on Friday the economic recovery trade appeared, as Basic Materials and Oil & Gas stocks (i.e., the inflation trade ex-gold) were in high demand from the outset.

All one-day wonders, i.e., no follow-through as the market seems to have amnesia from one day to the next. So, what’s going on here?

We have to assume these are black box strategies, designed to capture relative value (and incrementally increase returns) or to game the system. Like a gun can be used for different purposes, we don’t know the answer; however, the accompanying lack of transparency in the financial markets today hinders money managers from buying large stakes in a company over time. The week-to-week risk of holding illiquid positions simply isn't worth the reward, so everyone is forced to essentially be a day trader -- Buy what is hot in the morning, close the trade on the bell, come into the office they next day and do it all over again.

This gets tiring.

If the insiders have a scam going on, they simply gap open their stocks, and the rest of us are frozen out. However, this situation cannot continue for long. Market volume will contract as traders become disillusioned with the seemingly randomness of trends, burned out by the stress of trying to anticipate the next pocket of strength over the next 24 hours. Participants have to feel the risk they take is worth the potential reward, or they will take their capital elsewhere.

Even American pro traders might start looking to London, Hong Kong, Singapore or Toronto if this stuff keeps up. Nobody is forcing us to trade US listed securities. At the end of the day, we could leave the NY market to the likes of Goldman Sachs and JP Morgan. Then they get to control New York as well as Washington.

Seriously. Have you seen the volume? It’s HB&B’s black boxes making as much as 40% of all trades. And few of us want to be long more than a day. That ain’t healthy for the equity market. Bring in a transaction tax now and I’m sure they’ll have the casino to themselves, ie, nobody else playing.

Global Economics Review

Weekly International Economic Report .

I put much time and effort into summarizing Econoday’s informative, concise, and objective reports because they actually teach people something that can be used in trading decisions. I leave the links in because the individual reports contain terrific charts and other information, and after the report is published, the link leads to the updated report.

Here are the key US economic reports on last week’s calendar, which was a very busy one.

US Consumer Confidence for April. After the data was released, Econoday reported, “Pessimism may be easing as consumer confidence posted its biggest one-month jump in four years, to 39.2 in April from 26.9 in March (revised higher from 26.0). Expectations really improved, up nearly 20 points to 49.5 suggesting that consumers see recovery ahead. In an important plus on the psychology front, consumers see stable conditions ahead for prices. On the negative side, the current assessment of the jobs market shows no improvement with 47.9 percent saying jobs are hard to get, a reading that points to no let up in monthly payroll contraction… Confidence doesn't always relate one-to-one with spending but these results will raise talk that the worst may be over for the retail sector and in turn for the whole economy. Stocks bounced higher in immediate reaction to the report while Treasuries bounced lower.”

US 1Q2009 GDP index. Econoday reported: “First quarter GDP contracted more than expected but most of the weakness was in lower inventories. The consumer was stronger-than-expected. Overall, spending is not as weak as broad GDP. The Commerce Department's initial estimate for first quarter GDP dropped an annualized 6.1 percent, and followed a 6.3 percent contraction the prior quarter. The first quarter was worse than the consensus forecast for a 5.0 percent decline… The first quarter decrease was led by a $103.7 billion cutback in inventories, followed by a 3.9 percent annualized drop in government spending. The fall in government purchases was due to declines in both defense spending and state & local government spending. Housing continued to fall sharply along with business fixed investment. On the positive side, consumer spending picked up to a 2.2 percent gain after a 4.3 percent decrease in the fourth quarter. Net exports also improved… But in terms of demand, real final sales of domestic product fell only 3.4 percent in the latest quarter (GDP less change in private inventories) while real final sales to domestic purchasers declined 5.1 percent annualized (purchases by U.S. residents of goods and services wherever produced)… On the inflation front, the GDP price index jumped 2.9 percent, after a 0.5 percent annualized increase the prior quarter. The market had projected a 1.8 percent increase. The headline PCE index slipped 1.0 percent, following a 4.9 percent decline in the fourth quarter. Core PCE inflation firmed with a 1.5 boost, after nudging up 0.9 percent annualized in the fourth quarter… Year-on-year growth for real GDP contracted by 2.6 percent after dropping 0.8 percent in the fourth quarter… The bottom line is that the worse-than-expected decline was due to inventory adjustments. The consumer is doing better than expected. This is good news. If the consumer is holding up, the economy will not fall off a cliff. The report should be favorable to equities and also firm interest rates due to better-than-expected consumption. Foreign exchange markets were mixed on the news.”

FOMC policy meeting decision released April 29. Econoday reported, “The FOMC again kept its target rate unchanged at zero percent to a quarter percent and maintained its plan for quantitative easing as announced in recent FOMC meetings. The Fed left the discount rate unchanged at 0.50 percent. Notably, the FOMC made a modest upgrade for the economy, stating that "the economy has continued to contract, though the pace of contraction appears to be somewhat slower." Nonetheless, the Fed sees a sluggish economy continuing with "economic activity is likely to remain weak for a time." There is an expectation that monetary and fiscal policy will lead to stabilized financial markets and economic recovery but no timetable was given. Also, inflation is expected to be subdued… There was no change in the Fed's announced plan for expanding its balance sheet… "As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments." … Some may see the Fed as not being aggressive enough in expanding its balance sheet to inject additional liquidity. Although not stated, this may be due to concern by some FOMC participants that the combination of about $2 trillion in expansion of the Fed's balance sheet with additional deficit spending of $2 trillion by the Treasury in coming quarters is going to be very stimulative at some point. However, the vote for today's Fed action was unanimous, 10 to 0. … Markets saw the statement much as expected as equities were little changed immediately after the announcement. ”

US Personal Income and Outlays data for March. After the data was released, Econoday reported, “Personal income in March fell further as consumer spending retreated from recent gains. Yesterday's GDP report apparently gave a misleading picture of relatively healthy consumer spending. Meanwhile PCE inflation came in mixed. Personal income fell 0.3 percent, following a 0.2 percent dip in February. The March decrease was worse than the market forecast for a 0.2 percent decline. Within personal income, the wages and salaries component fell a sharp 0.5 percent, after dropping 0.4 percent in February. Consumer spending turned negative again with a 0.2 percent decrease after gaining 0.4 percent in February. March spending was below than the market projection for no change… PCE inflation was mixed as the headline PCE price index was unchanged, coming off a 0.3 percent jump in February. Meanwhile, the core PCE price index posted another 0.2 percent increase in March – the same as for the prior two months – and matched market expectations… Year on year, personal income growth fell to 0.3 percent from 1.0 percent in February. Headline PCE inflation dipped to 0.6 percent from 0.9 percent the previous month. However, core PCE inflation held steady at 1.8 percent… The March personal income report is more pessimistic about the consumer sector than yesterday's first quarter GDP report in which spending was up for the quarter. Now, the more current personal income report shows consumers having less income to work with and a pullback in outlays at the end of the quarter. This indicates possible erosion of the consumer sector in second quarter GDP… Today's report should be negative for equities and should ease bond yields. Another record high for continuing jobless claims should have the same impact.”

US Employment Cost Index for Q1. Econoday reported, “Labor costs are subsiding significantly, posing no inflationary risks. Readings across the first-quarter employment cost report are at record lows in more than 25 years of data including a 0.3 percent quarter-to-quarter rise in the main index. The year-on-year rate is also at a record low of 2.1 percent. Wages & salaries rose only 0.3 percent with wages & salaries for financial activities down 1.0 percent. Benefit costs were up 0.5 percent reflecting gains in blue collar groups, groups that are protected by contracts.”

US Business Activity report for Chicago region for April. After the release of the data, Econoday reported, “The rate of descent is definitely slowing in the Chicago area where the purchasers' index jumped nearly 10 points to 40.1, still sub-50 to indicate contraction but nevertheless a big gain. There's improvement across the report led importantly by new orders which jumped more than 11 points to 42.1. Backlog orders also showed less month-to-month deterioration, at 36.9 vs. March's 21.3. The Chicago report draws its respondents from across industries whether manufacturing or non-manufacturing. Order readings from the ISM had been mixed to improving in recent months and today's results point to solid improvement for both ISM reports… Other readings out of Chicago include a faster rate of inventory liquidation, showing that businesses are still resetting to a lower level of demand, and also a drop in prices paid which may be a surprise given this month's firmness in many commodity prices including oil. Stocks are extending opening gains in reaction to the report.”

US Jobless Claims for the week of 4/25. Econoday reported, “A huge jump in continuing claims headlines a mostly negative jobless claims report. Continuing claims in the April 18 week jumped 133,000 to 6.271 million, another record level and the 15th straight increase. A month-to-month comparison, useful for a gauge on the April employment report, shows significant deterioration, up 704,000 from 5.567 million at mid-March… Now the good news. Initial claims appear to have peaked in March, pointing to similar relief ahead for continuing claims. Initial claims totaled a lower-than-expected 631,000 in the April 25 week with the four-week average at 637,250, well down from a peak near 660,000 at the beginning of the month… The Labor Department said there are no special factors distorting the data and that the contraction is evenly distributed across jurisdictions. There was no significant reaction to today's 8:30 headlines but today's claims report does point to deeper lows in next week's employment report.”

US Motor Vehicle Sales for April. After the release of the data, Econoday reported, “Vehicle sales show little month-to-month change in April, at a 6.9 million unit adjusted annual sales rate vs. the same rate in March. Sales at now bankrupt Chrysler show severe month-to-month contraction. These numbers are for North American-made vehicles which make up the bulk of total U.S. sales. Imports sold at a 2.5 million pace, sizably down from 2.9 million in March. These numbers won't raise expectations for a rebound in April retail sales. Chain stores will begin posting their individual results for April through next week with the bulk of reports out on Thursday. Optimism on the economic outlook will not improve if the retail sales report, to be posted at mid month, proves as big of a disappointment in April as it did in March.”

US Consumer Sentiment Index for April. After the release of the data, Econoday reported, “Consumer sentiment picked up in the final April reading, confirming a run of positive consumer confidence readings. The Reuters/University of Michigan index rose to 65.1 from a mid-month reading of 61.9 and a March reading of 57.3. Like Tuesday's report from the Conference Board, today's report shows strength in expectations, at 63.1 vs. 58.9 at mid-month. Strength in expectations indicates that consumers may think the worst is now behind. Inflation expectations eased back a bit but remain stable at 2.8 percent for both the 1-year and 5-year outlooks. Stocks rose in reaction to the report.”

US ISM Manufacturing Index for April. After the release of the data, Econoday reported, “The ISM's manufacturing index continues to show slowing rates of contraction, at 40.1 in April vs. 36.3 in March. In an important plus seen in regional reports, new orders really improved, at 47.2 for a 6 point jump from March. Backlog orders also improved, up 5 points to 40.5. Inventories, needed to fill the rise in existing orders, may now be in balance. The customer inventories index fell back 4-1/2 points to 49.5 to indicate that firms think inventories are just right at other firms… Employment even picked up, rising more than 6 points to a still very weak 34.4. Prices paid, despite firmness in energy prices, continues to indicate steep contraction at 32.0… Stocks got a only bit of a lift from this report. One factor that limits its impact is the pending shutdowns in the transportation sector, a factor that will pull on readings in the coming months.”

US Factory Orders for March. After the release of the data, Econoday reported, “Factory orders fell 0.9 percent in March showing an even mix between a 0.8 percent decline in durables and a 1.0 percent decline in nondurables. Inventories fell 0.8 percent to confirm that destocking is deep, a big plus that points to easing strains ahead for the factory sector. Shipments fell 1.2 percent in the month but this component may show life in April given the big improvement seen in new order data in today's ISM report. This report for March is overshadowed by the ISM report which offers a look at April. But it's the look ahead at shutdowns in the transportation sector, which will begin to hit soon, that clouds the whole outlook for the manufacturing sector.”

Sector ETF Summary for International equity markets

The US market boost in the afternoon Friday a week ago gave the international equity markets a boost to begin this week. Same thing occurred in the final 15 minutes of this week. How long can this game go on?

Although this was another strong week in the international markets, there were a few signs of weakness this week. The EWC ETF for Canada gained +3.26% on Friday, which pushed it to a W/W gain of just +2.22%, so it was a loser Monday through Thursday. Russia (RSX) gained +2.96% on Friday, leading to a W/W gain of just +0.28%. Japan (EWJ, -0.12%) and China (GXC, -0.29%) ended the week losers, although it should be noted that May Day is a major holiday in much of the world and this was a very short week in many countries.

The big winner this week was the UK (EWU, +5.52% W/W including a gain of +2.73% on Friday).

US Equity Markets Review

This week the Nasdaq (+1.47% to 1719.20), S&P 500 (+1.30% to 877.52), DJIA (-1.68% to 8212.41), and Russell 2000 (+1.72% to 486.98) closed the week higher with RSI levels headed north for all series (M, W and D). But the Russell small cap 2000 ($RUT -0.12%) did suffer a pull-back in price on Friday.

The public is still clueless regarding Stress Testing of the Big 19 Banks. We ought to discover something this coming Thursday, but the regulators are now in a discussion of semantics, so the whole exercise is probably meaningless. In any case, even though banks will be required to raise capital – Citigroup (C) is rumored to need $10 billion – they apparently have six months to raise it. Give them enough lead-time, and they ought to be able to promote each other’s stock price to inflated levels, although that certainly didn’t happen this week. This week, the Financials were the only losing sector in the US – but maybe REITs had a lot to do with that loss.

This week will see many more speeches from Obama, Bernanke and Geithner, but are they starting to have a negative effect? The Ken Lewis - Henry Paulson - Ben Bernanke dispute will likely be swept under the carpet, so Americans are once again not going to hear the truth about who really runs the country, the US Treasury of Goldman Sachs (GS) and the Fed or JP Morgan (JPM)? Interestingly, President Obama said that he can’t tell banks what to do, but we know he can fire the CEO of the world’s biggest auto manufacturer, or used to be. We know he can push a group of traders from AIG out the door. However, he admitted he can’t do much about the people who run JP Morgan, Bank of America (BAC), Citigroup, Morgan Stanley (MS) or Goldman Sachs.

A week ago in this space, I commented that “I suppose anything can happen. This is after all, The Great Reflation. Give it time and prices (but not values) will lift.” Voila, on Friday, the Great Reflation returned to boost the week again.

Here is the list of the ten highest-weighted non-financial stocks in the NASDAQ Composite. Put them in a watchlist (see Google Finance Portfolio) and watch them like a hawk:

• Apple (AAPL)
• Microsoft (MSFT)
• Google (GOOG)
• QualComm (QCOM)
• Research in Motion (RIMM)
• Cisco (CSCO)
• Intel (INTC)
• Oracle (ORCL)
• Gilead Sciences (GILD)
• eBay (EBAY)

US Equity Markets Review

The RSI-7’s for the Monthly, Weekly and Daily were all upwards pointing this week, which was quite a reversal.

This week, the DJIA +1.68% to 8212.41), S&P 500 (+1.30% to 877.52), NASDAQ Composite (+1.47% to 1719.20) and Russell 2000 small cap index (+1.72% to 486.98) were all higher.

Traders are now firmly in day trading mode, but not committing much funds to the market, at least until they get their heads around the stress tests of the bankers, and how much dilution is close at hand.

Here is a dozen NASDAQ stocks to watch.

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Here is the Monthly data chart of the Interactive Chart of Nasdaq Composite, S&P 500, Dow30, and Russell 2000 (small cap) indexes.

Here is the Weekly data chart of the Interactive Chart of Nasdaq Composite, S&P 500, Dow30, and Russell 2000 (small cap) indexes.

Here is the Daily data chart of the Interactive Chart of Nasdaq Composite, S&P 500, Dow30, and Russell 2000 (small cap) indexes.

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Table 14: Dow 30 List

Sorted by 1-Week Price Performance

Symbol	Close	1Day Change	1Day %Change	1W %Change	2W %Change	4W %Change	YTD %Change	3M %Change	6M %Change	12M %Change
CAT	37.26	1.68	4.72%	10.79%	15.39%	18.14%	-20.57%	20.78%	-2.46%	-54.75%
DIS	21.94	0.04	0.18%	8.29%	7.65%	8.56%	-8.28%	6.09%	-15.32%	-34.11%
GM	1.8100	-0.1100	-5.73%	7.10%	-2.69%	-13.40%	-50.41%	-39.87%	-68.74%	-92.19%
BA	41.21	1.16	2.90%	6.43%	7.54%	10.78%	-8.93%	-2.60%	-21.38%	-51.75%
AA	9.690	0.620	6.84%	6.02%	4.64%	18.46%	-19.98%	24.39%	-15.74%	-72.09%
KFT	23.49	0.09	0.38%	5.53%	3.62%	2.26%	-14.08%	-16.26%	-19.50%	-26.48%
GE	12.69	0.04	0.32%	4.79%	2.42%	18.16%	-25.66%	4.62%	-34.96%	-61.68%
WMT	50.05	-0.35	-0.69%	4.55%	-0.30%	-6.69%	-12.47%	6.22%	-10.32%	-13.81%
IBM	104.61	1.40	1.36%	4.53%	3.30%	3.76%	19.73%	14.14%	12.52%	-15.37%
MRK	24.30	0.06	0.25%	3.62%	-5.56%	-10.00%	-21.61%	-14.89%	-21.49%	-37.61%
T	26.01	0.39	1.52%	3.38%	0.23%	-2.00%	-11.59%	5.65%	-2.84%	-34.88%
JNJ	52.59	0.23	0.44%	3.28%	-0.87%	-0.72%	-13.29%	-8.84%	-14.26%	-22.45%
PFE	13.58	0.22	1.65%	3.11%	-4.10%	-1.38%	-25.67%	-6.86%	-23.32%	-33.56%
XOM	68.01	1.34	2.01%	2.16%	1.89%	-3.19%	-16.70%	-11.07%	-8.24%	-24.18%
HPQ	36.52	0.54	1.50%	2.01%	0.61%	8.40%	-0.79%	5.09%	-4.60%	-23.96%
MMM	57.88	0.28	0.49%	1.54%	7.56%	11.03%	-2.21%	7.60%	-9.98%	-25.64%
INTC	15.81	0.03	0.19%	1.22%	1.35%	0.70%	4.01%	22.56%	-1.37%	-32.12%
CVX	66.87	0.77	1.16%	0.41%	1.30%	-4.89%	-12.61%	-5.18%	-10.36%	-29.57%
UTX	49.52	0.68	1.39%	0.30%	4.65%	7.79%	-9.88%	3.19%	-9.90%	-33.53%
PG	49.50	0.06	0.12%	-0.02%	-4.18%	0.16%	-21.18%	-9.17%	-23.30%	-26.15%
KO	42.47	-0.58	-1.35%	-0.75%	-5.66%	-6.33%	-7.47%	-0.59%	-3.61%	-28.13%
VZ	30.55	0.21	0.69%	-1.45%	-3.87%	-5.88%	-11.81%	2.28%	2.97%	-22.30%
HD	25.77	-0.55	-2.09%	-2.05%	-1.26%	4.04%	6.80%	19.69%	9.24%	-13.73%
JPM	32.49	-0.51	-1.55%	-2.67%	-2.32%	15.38%	3.64%	27.36%	-21.24%	-34.03%
DD	27.87	-0.03	-0.11%	-3.16%	-1.94%	10.46%	6.46%	21.39%	-13.01%	-43.05%
MSFT	20.24	-0.02	-0.10%	-3.20%	5.42%	4.92%	-0.44%	18.36%	-9.36%	-31.16%
MCD	52.40	-0.89	-1.67%	-3.52%	-6.58%	-7.01%	-17.80%	-9.69%	-9.55%	-13.99%
AXP	24.29	-0.93	-3.69%	-3.99%	11.37%	62.15%	25.66%	45.19%	-11.67%	-52.68%
BAC	8.700	-0.230	-2.58%	-4.40%	-17.92%	20.17%	-39.29%	32.22%	-64.00%	-77.91%
C	2.9700	-0.0800	-2.62%	-6.90%	-18.63%	8.39%	-58.40%	-16.34%	-78.24%	-88.57%

Go to Part II: U.S. Equities Sector Overview >>

Go to Part III: Bonds

Comment on this article >>

Comments

[Drew Arnold:]

I would disagree with the notion that investors lack of willingness to get long and stay long is "unhealthy" for equity markets. Two reasons:

1.) Is it even true in the first place? During the market's massive rally, surely many firms began to build back their long-term portfolios.

2.) After a huge rally like we've had, it makes perfect sense that investors would want to wait in order to see where the market goes from here. Consolidation is good for the market, not unhealthy. I'd suggest that any increased interest in day-trading that we may or may not be seeing is only an interim strategy until a few key banking and economic questions are answered.

May 02 01:58 PM

[Jeffrey Ber...:]

The rally quality was an A. The market indices are now overbought. How investors react to the inevitable pullback, coupled with the inevitable additional bad news on loan losses will say a lot about the next assault on the indices 200 day moving averages and the inception of a bull market on that definitional basis.

May 02 02:56 PM

[Donkey Kong:]

Please give me your address so I can mail you a razor and some shaving cream....


On May 02 01:45 PM Cetin Hakimoglu wrote:

> Looks like equities are on a tear, and the dollar is falling. risk
> is returning to the market.

May 02 04:00 PM

[Josh Stern:]

I think there is a good point buried somewhere underneath Mr. Cara's embarrassing whine: if we look back in history, equities have, in the long term, been a positive sum game, and no doubt part of that is that the U.S. public and govt. have gotten sold on the idea that the equity markets make a positive contribution to the U.S. economic system by helping to allocate capital efficiently; but if the U.S. public and govt. becomes convinced that the signal to noise ratio of economic fundamentals to market movement is exceptionally low, they will stop supporting this enterprise and result will be both that the market is less of a positive sum game, that it has less liquidty, and that there is lower social status and fewer economic rewards for market participants. So it' reasonable to believe that there is a potential "tragedy of the commons" problem connected with the phenomena that almost everyone comes to believe that assessing fundamental valuations is irrelevant to trying to make money in the markets.

May 02 04:01 PM

[abetterplace:]

I have definitely decided to master walking on water. Once I have achieved that I will master the second hardest feat I know of, calling this market.

May 02 04:28 PM

[aarc:]

China's Shanghai and Shenzhen indeces and the Taiwan $TWI index are the only green shoots in this otherwise weed infested global economy.

They have been springing greens shoots since October of 2008. 6 months of back-to-back rally cannot be discounted as a "bear rally" but rather can be categorized as a sustainable recovery rally. Shanghai was able to achieve 54% rally since Oct 2008 and the Shenzhen index 92%. Those are the A-shares. The B-shares are able to go much higher than the A's.

That is something not lost to international investors. Such massive rallies will generate massive re-investments into China. Just wait for a pullback in order to enter.

China because of their $600B stimulus package which is equivalent to $1,800B to the US since US GDP is 3x bigger than China's. Just imagine what $1.8 Trillion of stimulus package can do for the US if the Obama Team simply matched that of China's on the per GDP basis. But then the US can't possibly afford a $1.8T stimulus package.

And China is using that $600B on infrastructure projects which are much more stimulative than the US's $787B to be used basically on pork barrels since the US is already a well-developed country and may not need extra infrastructure projects but rather the usual maintenance jobs of those infrastructures which is not stimulative but rather preventive.

Taiwan is getting the boost because of the perceived easing of trade barriers against China. $TWI was able to rally 53.50% so far from Nov 2008 lows. It is going to need a minor consolidation before the next small rally on the weekly chart. After that, a bigger consolidation will be needed in order to support a bigger rally.

US and Europe are in no shape to recover immediately. Their economic fundamentals do not support a sustainable recovery and that show quite clearly on the monthly and weekly charts of the Dow Jones, SnP, Compq, DAX, CAC.

Likewise, the monthly and weekly charts of Japan, Hongkong, Korea, India, Australia, among others are still in shaky grounds and are more likely to go down to lower levels. Those countries are basically being driven into an unknown direction with China being bullish on the long-term and the US and Europe bearish in the intermediate terms.

The low volume in the US indeces during the last 2-3 weeks is because of a running consolidation some traders are calling a wedge but is starting to morph into a running triangle specially for Dow Jones daily and 240-minute charts. (See my previous posts on how this type of triangle usually resolves.)

China is going to finish or complete the current 6 months of back to back rally very soon. Rallies do not go on forever, corrections do and will happen no matter how bullish the rallies are. Besides, bigger corrections are needed in order to sustain bigger rallies in the future.

China's impending correction on the weekly chart is going to produce massive downward pressures to the Asian countries' stock markets including Japan. Then their "shaky" green shoots' viability will be subjected to the acid test specially if the US and Europe go into another sell-off as China goes into a pullback.

The US has been showing some "green shoots" lately. Late already as compare to China's and still highly questionable as to sustainability. Impressive as it is with 28.4% price appreciation since March 2009; Dow Jones' 8 weeks of tentative rally does not make a sustainable recovery.

Dow Jones will need to go over 10,590 on a sustained rally with minor corrections in the weekly chart before it can be considered safe and sound with more than 90% probability of sustainable rally in the years ahead. Minimum 1145 for that of the SnP500.

A minimum 63.70% rally from the March 2009 low. A tall order with very little chance of becoming a reality at this stage. We'll believe it when we see it.

This is not a garden-variety recession where 20+% rally means the end of the bear market. 28.4% rally for Dow Jones does not mean the Bear Market has already ended.

The western world is still deleveraging or "going back to basics" - Back to the Past, not the Future.

Next year perhaps, we start going back to the future.

China and the rest of the developing world are going more for bricks and mortars in replacement for their mud-huts and bamboo houses. They still have a lot of ways to go towards becoming developed or industrialized countries with the attendant consumerism boom in their respective countries needed in order for them to sustain their economic growth outside of the US and European consumers.

Thus, they are expected to resume their early 2000's rally with perhaps less vigor this time around since the US and European consumers will not be the same again for quite a long time to come.

Hopefully not until next year's expected rally, if it happens, will we be more comfortable that the US problems are psychological rather than systemic.

May 03 12:39 PM

[Peripheral ...:]

With corporations raising prices and consumer income declining, federal aid going to housing, banks and limited increases in unemployment insurance. It is difficult to see where the consumer will increase real net volume of much of anything. On the west coast bottom feeders are snapping up distressed property and leaving it sit. The unemployment rate only marginally reflects the new business that moved off shore as corporations chase the margins above everything else so I expect job creation in the US is and will be very dormant. One would suspect this data from Michigan is overstated and just a sign of relief that we are still here and spending but not a real outlook to base an investment on. I agree that it is a traders market where we see earnings from cost cutting and not top line growth. The mantra of cost cutting is a huge US hallmark but in many cases, it is the path chosen as less risk than doing new to the world products a capability that most US corporations have let decline over decades. Geographic expansion that just leverages the same old thing to more people is a cost effective tactic but it does little to expand the serving of the entire global market.

I would say since most companies have penetrated China and India that unless we see more innovation risk taking and we will see just more of the same trading and limited long term investment. The only sheltered long term investment companies are defense companies and they do not share their technology or products with the commercial market. They are worth a long-term investment.

May 03 12:39 PM

[Camden:]

Thanks for posting. While your comments on black-box trading were somewhat insightful, they also seemed a bit naive. So what if stocks in certain sectors go up and then down day to day! Should one buy because they move one way or the other on a given day? Of course not. Thousands of stocks are now 25% or more above their lows. Many are up 50% or more. If one is worried about black-box trading and not willing to look beyond the daily meandering of the sectors then one is not going to see the tremendous opportunities in front of them.

I hope you post those charts again in the future. It's good to get a big-picture look at what is going on. Looking at the weekly S&P it is clear the market still has A LOT of upside before getting anywhere close to a even 50% retracement of the 2008 crash. Also interesting is the recent out-performance of the Russell 2000 stocks. That move seems to be rolling over.

May 03 02:32 PM

[donzelion:]

Re consumer spending:
(1) gas is down to remarkable lows, leaving more disposable income for consumers to make up for deferred purchases last year;
(2) a stronger dollar makes imported goods seem cheaper,
(3) laid off workers are spending severance packages on bulk necessities.

Unemployment will slow in future quarters - as more employees take early retirement rather than layoffs. That will encourage day traders, but certainly won't help the economy.

My hazy recollection from April/May '08: "The worst is over, the crisis is contained, the crisis is merely a financial hiccup and has nothing to do with sound fundamentals..." A bunch of nonsense on stilts.

Of course, we do have the "stress tests" - and aside from a handful of B+ grades, the banks will pass with flying colors. This emperor has no clothes, and this rally offers little more than heartbreak.

May 03 03:18 PM