Markets Are Starting to Roll Over

Macro Man's back in the saddle, or at least his office chair, this morning. Just in time for that noisiest of days, the US payroll report. Unwillingly or not, it is difficult for a macro manager to avoid getting sucked into the mosh pit of NFP. One can only hope that the end result produces more of a Ode to Joy.

Speaking of Beethoven, it certainly looks like a lot of things are starting to roll over. Going beyond the usual peaks and valleys of market price action (more on which below), it certainly does seem like the second derivative of growth data is starting to look decidedly weedy.

A roll over in economic surprise indices, noted in this space on several occasions, is axiomatic as forecast profiles are adjusted. But it looks like we are now seeing an adjustment in the actual underlying trend of economic data....potentially heralding the onset of the second half of the much-ballyhooed "W" profile?

Last night's auto sales figures, the first after cash for clunkers came to an end, is a case in point. Sales fell back nearly to their early year lows, with domestic sales in particular undershooting expectations. So while consumption should show a nice rosy pop in Q3, we're setting up for a rather less positive figure in this, the new current quarter.

Similarly, the inventory cycle appears to have finally turned. The ISM new orders-inventories spread, which soared earlier in the year, fell sharply in yesterday's report. While this suggests that inventories are being built in real time, which is actually accretive to GDP, there is likely to be a decent offset as some of that build comes from imported goods, widening the trade deficit.

At the same time, in the absence of a sustained rebound in final demand, the end result will just be another undesired increase in inventories, which will then need to be run down next year.

Looking back at the last cycle, the ISM orders/inventories spread peaked in March before heading back down over the next several months. The stock market swiftly followed suit.

In that vein, this week's weakness in the SPX (and other risky stuff like Eastern European currencies) could be telling. As readers have no doubt observed, many major indices, including the SPX, have broken what appears to be a pretty important support line.

But wait.....stop me if you've heard this one before. One could have (and, in the case of your author, has) drawn a large number of similar trendlines over the past six and a half months.....none of which have worked terribly well.

So while bearish risk structures are making some pretty sweet music this week, from Macro Man's perch the jury remains out. Yes, the data has rolled over like Beethoven...but having been burned before, he will reserve judgment before playing the Victory March....it could all still go to the dogs.

Comments

[TheFounder:]

We are still in bullish territory, technically speaking. Taking a short position now is a bet which has a 50/50 chance. I personaly believe we were in a bear market rally, which will end at some not too distant point, consistent with a W or L shaped recovery, but this moment in time is too obvious to make this call a winner.

Oct 02 09:38 AM

[Tony Petroski:]

Roll over Beethoven. Chuck Berry or the Beatles?
Either way, nice one Mr. Man.

Victory March?

Chopin, Funeral March

Oct 02 10:30 AM

[I need more...:]

C'mon get real. This market is so rigged and they are not even trying to hide it. The worse the news, the more the counter rally, using dollar weakness, and god knows how much of our money, taxpayer money, to prop up this ridiculous house of cards.
Astonishing to witness.

Oct 02 10:49 AM

[cyclingscholar:]

Holy Macro-Man Batman! A second derivative! Haven't we had a tough enough time with first derivatives these days, not just in Calculus but in the financial markets? Spot on comment about the trendlines. I suggest you add a/d line and On-balance-volume to your analysis and interpret them for us? Could ya also comment on the inflated premiums for Puts, vs calls?


cyclingscholar

Oct 02 11:49 AM

[Steve Pasq:]

The stock markets could go down another 80% in real terms. Chartwise the SPX looks to be at the same point as the NIKK in 2002 with a similar political back drop in Washington DC. It's not hard to fathom businesses fighting over the declining share of consumer dollars over the next 10 years and ruining any remaining margins. There is too much capacity without a home so companies will fight and lose money for a while to stay in business. It could be a long slow workout.

Oct 02 12:24 PM

[punk_ash:]

there were plenty of posts like these from march until August. One down day and we got these posts again. This is a bear market rally and only the best traders will be able to get out in time. Most of us are better served if we do not play.

Oct 02 01:03 PM

[untrusting ...:]

Ok, but if you want to make any returns, you have to invest in something. Be it cash at 1% with lost purchasing power, or gold/commodities, or bonds, or foreign currencies, or foreign equities, or real estate. What is it that you recommend ... or do you just default to cash at virtually no return and lost purchasing power?

Personally we have done just fine with selling well out of the money puts, collecting the premiums, and waiting for much lower prices. They have certainly provided a much better return, with much less risk than cash or treasuries.


On Oct 02 01:03 PM punk_ash wrote:

> there were plenty of posts like these from march until August. One
> down day and we got these posts again. This is a bear market rally
> and only the best traders will be able to get out in time. Most of
> us are better served if we do not play.

Oct 03 02:12 AM

[untrusting ...:]

Hey Macro Man,
Have you noticed, that the late day spikes that have supported the market since March have pretty much disappeared now. In fact, in the last few weeks it seems that the spikes have been accelerated selling into the closes (in spite of mid-day attempts to support the markets after big early morning sell-offs). Any thoughts or comments on the change in spike behavior in the markets lately?

Maybe GS and the prop. desks have finally figured out that they have made about as much as they can on driving the markets higher. If they want to keep booking those multi-billion dollar trading profits and bonuses, then maybe they will have to do it on some big short sales and some serious downside corrections. Any thoughts or comments on that possibility?

Oct 03 02:25 AM

[Albertarocks:]

Your chart showing the trend lines brings back bad memories for me. Not only were the trend lines violated only to see the now famous stick save, time after time, but each of those occasions also saw the MACD drop out of overbought territory. That of course issued "sell" signals, and each of those times the bears got trapped (myself included).

Sooner or later that will have to end. That's why I've contended that the more the market is pumped higher based on the bankers' agenda rather than on any fundamental logic, the more violent the fall will be. In fact, I think the so-called "dumb money" retail investor has grown so suspicious that he's not even in this market yet, in any great numbers.

So even though it makes no sense to me, it's possible that the table is set for higher prices if, and it's a big "if", the market makes some sort of rally almost immediately from these levels. The internals are breaking down, the air is full of suspicion, and the pattern (if you're an Elliott wave enthusiast) more or less dictates that this is a crucial decision point. It's on the cusp, and as absurd as it sounds, the markets could still go either way. It's at the point now, that if the "dumb money" retail investor has indeed waited this long, and if we see a serious enough tank job this week, the "dumb money" is going to see it for what it really is and won't get sucked in at all. He's going to look a lot smarter than the condescending bankers ever imagined. I think Monday is the most important trading day since the March lows.

Stay sharp my friends!

Oct 04 03:32 PM