Stocks Trying to Trade Against Negative News

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Includes: DIA, QQQ, SPY
by: Daryl Montgomery

Stocks have been attempting a recovery in the last few days for technical reasons. While they have managed to hold up despite a wave of damaging economic reports, some weakness is showing up in today's trading. Nevertheless, the market's performance has been impressive.

The S&P 500 and Dow Jones Industrial Average spent 18 days in a row trading either fully or partially below their simple 200-day moving averages. On Tuesday, they both managed to close above their respective 200-days and above the neckline of a possible double bottom. This was technically quite bullish. The S&P 500 fell below its 200-day for a while in morning trade today, which is a sign of weakness however. The Dow managed to hold at that line. The S&P has been trading below its simple 50-day moving average since May 5th and the Dow has been below its 50-day since the flash crash on May 6th. The 50-days for both indices are still above their 200-days. The 50-days falling below the 200-days would be a significant bear market signal. We are not there yet.

The news today did not indicate either a healthy economy or financial system. Weekly jobless claims increased 12,000 to 472,000. Anything around 400,000 or above is evidence of a recession. The Philadelphia Manufacturing Index dropped from 21.4 in April to 8.0 in May. It turns out that 90 banks missed their TARP payments on May 17th and many of them are trying to alter their repayment schedules. Spain managed to sell its full compliment of bonds in its auction, but had to pay very high rates to get them out the door. Spain looks like it will be the epicenter of the next crisis to erupt in the eurozone.

The future economic picture is not looking good. The most disturbing aspect of this is that government spending, the traditional Keynesian solution, just doesn't seem to be working this time. The U.S. federal government borrowed $1.42 trillion in fiscal year 2009 (ending on September 30th) to pump up the economy and the GDP during that time fell from $14.547 trillion to $14.178 trillion. This year the feds are on track to borrow $1.6 trillion. Will the GDP increase by $1.6 trillion? It's not likely. In order to do so, it would have to be over $15.84 trillion by this September. The most recent figure is $14.60 trillion. So for every dollar of borrowing, we are not getting anywhere close to a dollar of GDP growth, but we do get more debt that we have to pay interest on from now until forever. In the long run this is a losing game. In the short run, things don't look so good either.

Disclosure: None