Economic Recovery: Thumb In The Keynesian's Eyes

Includes: SPY
by: Gary Jakacky

Not that the issue was ever in doubt, but the onslaught of positive economic statistics released this morning seal the deal. Terminate quantitative easing and allow interest rates to continue rising as the economy strengthens.

The two durable goods reports, the three housing market gauges, and even consumer confidence show an economy ready to enter a faster growth phase. Data from previous months was either revised upwards or trimmed only the slightest amount.

The market reaction has been exactly what you would expect:

  • lower bond prices as interest rates are pushed up by increasing demand for capital.
  • lower inflation indexed bond prices as increasing production, a stronger dollar, and stable fossil fuel prices keep prices in check.
  • lower gold prices as higher rates increase carrying costs and economic growth presents greater profit opportunities elsewhere.

Thus the sell-off that began in early May, to this point, must be viewed as a correction in the Bull Market that began in 2009. In the larger scheme of things the current sell-off is barely visible on an intermediate term chart. Look at the SPDR S&P500 ETF (NYSEARCA:SPY):

(Click to enlarge)

Are there some signals short term traders (and angst ridden buy-and-holders?) should look for to suggest this correction has finished? Examination of the SPY daily chart below suggests several:

(Click to enlarge)

  • First, major indexes should regain their fifty day moving averages. If the fifty day offers resistance instead, we should expect another leg downward.
  • The number of advancing stocks should be greater than the peaks of about 2500 issues that we have seen in recent months. We need new leaders to take control and more followers to march to the bullish music.
  • We need to see higher volume on the up days. This has been a serious consideration throughout May and June.

Watch for those triggers.

It will be difficult for the market to continue to ignore the solid performance of the economy. What a thumb in the eye to Keynesians, who suggested last autumn that "government austerity" and the "fiscal cliff," would slow the economy down!

Exactly what you would expect in a recovery which owes its very soul to private entrepreneurship, especially in the fossil fuel sector.

Disclosure: I am long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.