Stock Market Recovery Is A Dead Cat Bounce

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Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV
by: Katchum
Summary

The stock market has recovered markedly in the beginning of 2019.

Leading indicators suggest the market is wrong.

Stock buybacks are causing a dead cat bounce.

A few months have passed since the stock market correction in December 2018. Today, the markets have recovered, and it seems nobody is worried anymore (see S&P chart below from Yahoo Finance). However, the numbers are not looking good, so caution is advised if you decide to jump into the stock market.

First of all, the leading economic indicator has hit a new low for the year (See FRED chart below). We haven't seen such a bad number since 2010. So I expect that the coincident "soft" indicator will follow soon. Let's go over the deteriorating "hard" indicator numbers.

The latest GDP numbers were abysmal. The Atlanta Fed slashed its GDP forecasts for Q4 in half to 1.5%. So we are really approaching a recessionary period here.

Inflation-adjusted retail sales are now negative year over year (see FRED chart below). Retailers like J.C. Penney (NYSE:JCP), Macy's (NYSE:M) and Nordstrom (NYSE:JWN) have been underperforming.

U.S. industrial production has now reverted back into a downtrend (see FRED chart below).

The U.S. trade deficit improved in November 2018, but it is still pointing down (see FRED chart below).

Producer prices are crashing down, which suggests that consumer prices will follow the same path (see FRED chart below).

It is probably too early to tell, but initial jobless claims are now starting to move higher, because real GDP growth is weak (See FRED chart below).

The conclusion is that there are multiple signs that the economy is cooling down: GDP growth is weak, inflation is low, and jobless claims moving higher. All the ingredients for a recession are present. With this in mind, I also suspect that the Federal Reserve will end QE this year.

You might wonder why the stock market is up for the year then? The answer lies in stock buybacks.

All the money that was being repatriated back into the U.S. and all the money from tax cuts have been flowing into stock buybacks since the start of 2018, and this will continue until the end of 2019. We are now halfway. If you're smart, you'll take this opportunity to reduce your risk.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.