Good morning. The debate over whether or not the US economy (or any other economy of the world for that matter) will dip back into recession seems to be the focal point of the markets at the moment. Interest rates have fallen to their lowest level in nearly a year on the back of the flight to safety trade, much to the chagrin of our President, the austerity movement is catching on in Europe (which will almost assuredly slow economies across the pond), and several noted analysts are now openly talking about the potential for a double dip here at home.
Conjecture may be one thing and it is always scary when the talking heads start talking openly about bad things happening to the economy. But at least part of the reason behind this weeks' thrashing in the stock market can be tied to something a little more substantial as a well known and well respected economic indicator has flashed a new recession signal.
The Economic Cycle Research Institute (better known as ECRI) issued a report on Wednesday that featured their Weekly Leading Economic Index. The index is widely followed as it has a pretty good record for "calling" the direction of the economy. The problem is the indicator issued a "recession" signal this week. And while the indicator isn't perfect (since 1969, 78% of the signals have been accurate) and tends to be a little early at times, this appears to have been as good a reason as any for traders to start thinking about the potential for a double dip in the future.
There were other ominous happenings yesterday that may have more directly driven the action to the downside including the increasing CDS and bond spreads relating to Greece, lingering concerns about the FOMC's slight downgrade to its economic assessment, worries over the impact of financial regulatory reform, a growing concern that the upcoming earnings season will disappoint, and a dampening of expectations from the consumer.
All of the above led to a fourth consecutive down day in the stock market. There is really no way to sugar coat the situation. About the only good news is that stocks are quickly becoming oversold and the sentiment may be more than a little one-sided at the moment. Therefore, we would expect to see a bounce to retest what is once again overhead resistance in the near term. However, given the technical damage that has been done lately, we're going to keep our enthusiasm curbed until and unless our heroes in horns can get their act together in a meaningful fashion.
Staying objective, it is clear from a chart standpoint that we find ourselves now stuck in a trading range. As such, one has two choices going forward. Aggressive traders can attempt to "ride the range" by buying the lower end and selling the higher end of the range. Or, the other way to play is to wait until the market breaks out of the range and embarks on a new trend. Either way you decide to play, the game looks like it is going to be tricky for a while, so let's be careful out there.
Turning to this morning... There is a slight sigh of relief in response to the Financial Regulatory Reform bill passing by Conference Committee. In addition, Oracle's (NYSE:ORCL) earnings are giving the market a modest boost this morning as the report reminds traders that there are no signs of economic slowdown occurring just yet at many companies.
On the economic front, the government’s final revision to first quarter GDP shows the economy grew at an annualized rate of 2.7%, which was below the expectations for a growth rate of 3.0%. Looking at the all-important consumer activity, the Personal Consumption component of the report came below expectations with a gain of 3.0%, which was below the estimates for 3.5%. On the inflation front, the GDP Price index was a tenth higher than expectations at 1.1% and the Core PCE was also a tenth above consensus at +0.7%.
Finally, best of luck on this Friday and be sure to enjoy your weekend!
Here are the important indicators we review each morning before the opening bell:
Major Foreign Markets:
- Australia: -1.44%
- Shanghai: -0.51%
- Hong Kong: -0.21%
- Japan: -1.92%
- France: -0.56%
- Germany: -0.45%
- London: -0.20%
- Crude Oil Futures: + $0.41 to $76.92
- Gold: + $5.30 to $1251.20
- Dollar: Higher against yen, euro and pound
- 10-Year Bond Yield: Currently trading higher at 3.14%
Stocks Futures Ahead of Open in US (relative to fair value):
- S&P 500: unch
- Dow Jones Industrial Average: +4
- NASDAQ Composite: +2.4
Disclosure: No positions