On the Disconnect Between the Market and the Economy

Includes: DIA, QQQ, SPY
by: Michael Shulman

It has been an interesting 24 hours.

  • The index of leading economic indicators fell 0.2% in June, the second drop in three months. A negative surprise.
  • Unemployment claims rose to 464,000, more than expected.
  • Uncle Ben said we are facing a period of “unusual uncertainty.” No kidding.
  • Uncle Ben said we need continuing stimulus to a Congress unwilling to stimulate anyone or anything other than lobbyists with cash to contribute.
  • Home sales fell 5.1% in June.

All within 24 hours. And with all this bearish data the market is up 2.5%, ostensibly because of earnings and a bump in European exports. What is really going on is a massive day trade and short covering rally based on a cheapening dollar as bond prices rise and interest rates fall. Not to mention Bernanke said things are weak, may get weaker, and that means more liquidity and cheaper capital to borrow and trade.

Markets can move on their own for a while -- but not forever. The economy will catch up with corporate profits and bullish trading. The longer reality is ignored or pushed aside for a daily trade, the harder stocks will fall. Right now, we are on plan for a slow motion train wreck. The longer it takes for the beginning of the derailment, the harder that train will crash.

Don’t take my word for it. Perhaps the greatest and certainly one of the most respected technicians in the world, Louise Yamada, does not see many good things happening. Just listen. She sees the market giving us a sell signal based on failed rallies. Not to mention she believes we are in a structural bear market similar to 1929-1942. That bear market ended, sort of, with the Japanese bombing Pearl Harbor.

Weakening fundamentals, based on data and not wishful thinking, plus the best technician in the world is seeing a correction. Sounds like the market is increasingly separate from reality.