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Friday, July 6, 2012 - Short Term Update - Turning Lower

|Includes:DIA, FXE, QQQ, SPDR S&P 500 Trust ETF (SPY), TLT, UUP

Bottom Line:

Yesterday I noted the severe overbought technical condition in the equity market, a rally which was not confirmed by either the bond market nor the currency market. Following this morning's disappointing jobs report. futures tumbled, and stocks were unable to make up the lost ground during the regular session. Based on where the indicators I watch are currently at, further downside is the highest probability outcome.

Update:

As I mentioned yesterday both the 30 year and 10 year yield have been refusing to confirm the rally in stocks. I also noted that they have been consolidating in a sideways pattern for approximately four weeks. Typically, the longer something is consolidating in a sideways move, the more important the breakout. While the 30 year note yield fell today, all the way to the bottom of the pattern, it did not break down through the bottom of this congestion pattern.

While 30 year note yields did not break down through the lows of this pattern, I think it is telling that bond investors are basically saying that they are as nervous as they have been in the past four weeks. I would say that if there's a disagreement between the equity market and the bond market, 8 out of 10 times, the bond market is correct.

A little bit more encouraging to the bear case, 10 year note yields did in fact break down through the bottom of this pattern and continued lower throughout most of the day.

Based on the height of this pattern, and the amount of time spent in this pattern, if this is a true breakout we should see the 10 year yield below its all time low sometime next week. This of course has negative implications for the stock market.

Without going through the whole host of indicators that I watch, the market overall still remains very overbought.

Looking at the Mcclellan oscillator we can see that the three day moving average crossed below the five day moving average, also producing a momentum divergence while remaining severely overbought.

Summary:

Personally I do not find that looking economic data to be all that helpful when it comes to trading. That said, I do have a background in economics, and to me today's numbers are nothing but the continuation of a stream of disappointing data points that suggest that the U.S. will follow the economic examples of Europe and Asia, that is to say a double dip recession is likely.

Based on tax withholdings, even the 80,000 jobs added number seems high, and is most likely to be revised lower to somewhere closer to 75,000 - 70,000. It's been my experience that the government loves to overestimate then revise lower one to two months later when no one cares anymore.

After adjusting for inflation, real wage growth in June was probably only 1% or less, and it seems highly unlikely that we will escape this economic morass with real income growth this low. Furthermore, it appears to me that the "real income growth" has been the result of declining inflation; specifically the drop in oil, energy and the increase of the U.S. dollar vs. the Euro, the last few months, rather than people actally getting paid more money.

If the economy was really improving, which would be better proof, income growth due to declining inflation, or better than expected job growth?

That's all for now, we'll talk again Monday,

-Bill L.

Disclosure: I am long BGZ.

Stocks: SPY, TLT, DIA, QQQ, UUP, FXE