After the S&P 500 index reached its highest level since 2008 early last week, it took its biggest weekly drop so far this year late the same week. What had spooked the market were reports that manufacturing in the eurozone and China are in a deeper contraction than previously forecast. The China syndrome especially has the market on edge, because if the Chinese economy tanks, the global economies might be in danger of drowning, taking the global stock markets along to the bottom.
Also, according to the bears, this notion that the U.S. economy is doing well is a bunch of hooey. For last year, the consensus among economists was that the U.S. economy would have a 3% to 4% growth rate. Instead, the economy came in with a miserly 1.7%. So, despite force feeding the economy with a zero % rate policy for three years, including trillion dollars plus deficits, this is going down as the weakest economic recovery ever.
This is also why all that cash still sitting on the sidelines will be recognized as the smart money, because the rally that started last November has been nothing more but a streak of hot air that is about to dissipate.
Whew - how can you beat that? The counter argument by bullish market strategists is that the economy as well as the stock market respond to what is better or worse, and not to what is good or bad. Looking at it that way, there is no doubt that the manufacturing, goods and services sectors of the U.S.economy, including commensurate employment growth, are on a fast track to getting better, not only when compared with its own past performance but especially when compared with the other economies out there.
So who to believe, the bulls or the bears?
Well, let's check the Troika charts below. Over the past three years as a directional tool for the market, this Troika managed a perfect record simply because of its simplicity. At times, trailing the top or bottom of a trend a bit, it has kept its practitioners safely in the middle, and always in the right direction. Of course, some experience and judgment helps to interpret the nuances of a move successfully, but like anything else, this comes with practice.
For as long as the S&P 500 (SPY) index along with the bull trend BGU components of this Troika are being guided higher by the positive configurations of their respective green, red and yellow internal MA lines, while the bear trend BGZ component is being guided down by a negative configuration of its MA lines, the market remains in a rally mode and the economy poised to expand.
These green, red and yellow MA line positive or negative configurations apply to every aspect of the market, be it a sector, commodity, stock or ETF. If at the conclusion of any analysis the underlying MA configuration points in the opposite direction, better take a second look.
(Click charts to enlarge)
So all in all, we are on a solid uptrend in both the North American economy and the stock market. This is why the sentiment in the U.S. Financial markets is shifting from thinking global to thinking local and leaving the concerns over the eurozone's fiscal and economic fiascoes over there.
As far as the slow-down of China's economy is concerned, it is not going to tank and is just what it is successfully aiming for in order to brake an unsustainable development pace and avoid a bubble situation.
So enjoy the ride to the upside.