Sep 30, 2010

Savings Rates

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Sep 27, 2010

Up To The Next Level Or Not?

This September is reported to be the best in many years for the stock market and is showing signs for rising further. At current level S&P500 is above important 200 moving average and double top resistance level. Last week selling pressure was test of that brake. Hopefully it was not successful. Now the index is headed north with technical target 1180. That is some 4% higher than current level.


The question rising is whether this growth is sustainable. It depends on coming economic data as this week is revealing important macro numbers. Consumer sentiment, confidence and spending will show is recovery supported by consumers. Around 70% of GDP is formed by consumer spending. Positive values will support the rally. Case-Schiller Home price index will show is June rise in home prices continued in July. GDP revision and ISM forecast are giving positive mood for the week end with not expected down revision and rise in ISM.

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Sep 20, 2010

US Really Getting Out Of Recession? Cross Sectional View Of Key Economic Measures

Recent improvement in some of the macroeconomic indicators are signaling positivity for the majority of investor public. Even National Bureau of economic research has stated the end of the recession started second half of 2007. From theoretical point of view if we have at least two consecutive positive growth quarters we have expansion and opposite for recession. Last recession is perceived to be the longest since great depression with 18 months length. 

Recent big market move since March 2009 is calculating sharp recovery. And it did happen, but is it sustainable? Improvement in macro indicators tend to lag after significant government intervention in the economy. This lag is 6 to 9 months. It is visible with the last bailout plan announced October 1, 2008. Just 6 months later (March 2009) the markets started improving sharply (as they fell) calculating strong recovery. Macro indicators started improving few months later. But reality now is different. The bailout effect has expired and government stimulus has gone so it is the moment at which the economy is showing its real face. Looking back in the previous two recessions GDP growth usually shows second slowdown in the middle of recovery. That is the point at which reality meet high expectations. Investors realize that this moment boom is government driven. As it often happens economy is not so bad as it is thought to be and not so good as we would like to be. The truth is somewhere in the middle.

Let’s examine change in selected US macro indicators and their relation to stock market moves represented by broad index S&P500. This will help us determine at which point of the cycle we are and what to expect.  Time series include period from 1980 to date for quarterly data for GDP growth, monthly federal funds rate and CPI index data showing change on a yearly basis.

The period includes four recessions: July 1980 – November 1982, July 1990 – Mar 1991, Nov 2000–Oct 2001 and last one: Dec 2007 – June 2009. Common in all of them is fall in GDP growth followed by fall in interest rates. The exception is 1990-1991 recession where we have rising inflation because of the 1990 oil price shock triggered by Iraqi invasion in Kuwait. The fall in interest rates is preceded by fall in stock markets. After the recovery of GDP growth supported by prolonged period of time with lower interest rates, the GDP number has short retreat. As mentioned above this is post recession effect. During temporary GDP pull back investment and capacity rise without real rise in demand. This gap is leading to subsequent slow down, but the recovery is still on track.

Closer look at last two recessions gives detailed information. Nov 2000–Oct 2001 recession was triggered by dot-com bubble burst. This slow down, although not the biggest in GDP numbers, has left stock markets suffering for a long time. GDP started recovering end 2001 while S&P500 turned bullish mid 2003. Interest rates were kept low almost two years and many blame that Greenspan’s decision for pumping sequential bubble – the housing bubble, which led to current crisis.

Although started as a purely financial it shortly became economic crisis leading to 18 month recession – the longest since great depression. During that period inflation has peaked over 5% and then dropping significantly to -2.10% at the beginning of 2009. This raised question for deflationary pressure. Again this was oil price effect as it dropped from $148 Jul 2008 to $35 Dec 2009. The reason: world economy slow down hurts oil demand. Still housing sector has way to recover as prices are highly deflated from their April 2006 peak. The drop in Case-Shiller Composite index since April top up to date is 29% although there is some recovery, which is positive sign. As seen in the chart this is supported by GDP recovery.

Move of the stock market is perceived to be a measure for the overall economy. First chart proves it. Of course one should consider its inefficiencies and overreactions in both market directions. Interesting pattern seen in last two recessions is that bear market starts when interest rates begin declining. The drop in markets ends when interest rates bottom. From this point of view we can consider we have new long term bull market started. At this point we are on its first test. Usually stock markets trade expectations for future path of the economy. So markets have calculated the recovery and now are in idle position. As mentioned above and according to many economists we should expect slow down in GDP growth. This view is consistent with previous recession, where after weak recovery the growth slowed before continued its rise. If this is the pattern now we should expect minor pull back in growth and in stock markets. Of course the type of both recessions is different and the causes for them are, but the recovery pattern should be the same since the stagnation during that period affected all sectors with no exception. One significant difference from last recession to any other is the debt level. The main burden to growth now is debt ratio. Is has been constantly rising last years reaching unsustainable levels. Now economy is entering period of personal debt deleveraging, which means lowering debt levels by shorting consumption. This is weighing on aggregate demand and hence GDP growth. The debt issue concern not only private but also public sector.


All government stimulus programs has led to significant rise of public debt. In other words printing money. This not only leads to unsustainability but lowers the dollar value and inflates the precious commodities like gold. And it is seen in the recent precious metal price. It broke $1350 and it will continue climbing further considering that facts.

The recovery is imminent. The question is at what pace it will move. Current market level has priced sharp recovery and if new numbers are not satisfactory we could see another major market correction. 

Rally Could Continue

Last week I pointed out the accuracy of using market breath indicator like percentage of stocks above their 50 MA compared to the moves of broad market represented by S&P500. I’m continuing following this indicator and adding another one. VIX is well known as a market fear indicator. It moves inversely with the market and entering certain levels shows clear signals of market reverse.

As seen from chart (more charts at the market (right hand axis) continued last week rally pumping stock prices higher with almost 73% of them above 50 day moving average. Thus indicator (green line, left hand axis) has reached levels close to overbought area. The overbought area is determined by +1SD (standard deviation) of the followed indicator. As I mentioned in previous post this has to be considered as a cautious signal, however it does not mean immediate fall. Indicator could stay at this area for a long time. VIX indicator is supporting this argument. At the moment VIX is 22.01. Values above 30 are considered to sign panic markets while lower measures point low volatility and growing stocks. Still there is more place for VIX to fall before it reaches overbought levels of the market. There is pattern for this indicator. Usually it saturates around oversold levels before reverse (market falls), which means rally can continue. 

Sep 15, 2010

Is Market Losing Steam?

It’s been really good month for the markets so far. S&P500 has gained 6.60% month to date, inspired by few positive macro news or US economy. Better unemployment claims and retail sales helped fuelling the best rally since July. However at the moment markets are entering losing steam area. At this point every bad signal for the economy is excuse for cashing profits thus pushing prices lower.

The chart shows successful brake over first resistance and moving forward to current level which is between double top resistance and 200 moving average. Still there is more room to grow as market breath indicators are not overbought, but close to this level. Considering that situation recent market moves has to be cautiously followed.

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Sep 9, 2010

September Market Breadth

Perfect measure for the market breadth can be considered percent of stocks above 50-day moving average compared to the S&P500 index move. As most efficient things are simple it is simple. By showing number of stocks above its 50 day MA we can get an aggregate view of market condition - overbought or oversold at given time. As you can see on the picture whenever the indicator (green line) reaches overbought area, which is determined by +1SD (standard deviation) it is showing sell signal and soon after the market falls. We have same configuration but with buying signal when it reach -1SD area. Values over/under 1SD are showing extreme market conditions and are even stronger signals.

To prove the accuracy of the indicator let us turn back to history. During last two years there’s been many buy signals. During bullish market after March 2009 repeated pattern occurred. After reaching -1SD value the indicator sharply turns back and reaches overbought area than staying there around 3 months before significant drop (market correction). During bullish market the correction is short which is visible on the chart. However last market selloff showed buy sign similar to this seen at the end of 2009. This could suggest that we might be entering new bear market. According to my observations this is not the case for the moment, considering recent market consolidation.

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Oil Moving Flat

Recent move of oil has reflected rising doubts over sustainability of US and world post recession growth. Slowing world economy lowers demand for energy and fuels. After steep correction lasting entire August at the beginning of September WTI is showing some signs of upward momentum. Still US inventories are quite big number (3.4 m for August) although slowing from 4.1 m barrels. This stock is fact due to slower demand trough summer months. Coming heating season is rising expectations for positive move of the price.

From technical point of view WTI is consolidating just in line with the capital markets. Crude price is below 200 MA which leaves it room to grow but main price driving factor here are economic recovery expectations. I am expecting price consolidation to continue next 2 months with possible target $87 per barrel.

Sep 8, 2010

Market Overview

After reaching two month bottom at the end of August S&P500 has rebounded sharply gaining 5.45% for only 3 days. That was retracement of the corrective move through entire August. Slowing macro indicators and persistent unemployment numbers cooled positive investor sentiment from first half of the year. Now after all positive effects from stimulus package has disappeared the economic reality is calculated in stock prices. Considering mentioned above from end of May the stock market entered consolidation period. S&P500 is moving like snake in the tunnel, trying to find direction. Investors are nervous about growing signs of second recession wave. It is not likely to happen rather slowing leading macro indicators like growth, industrial production and private consumption. This determine my view of continued consolidation with higher volatility over next 3-6 months. But if economic indicators worsen further even deeper correction is possible.

Closer look at the index technical indicators shows mixed signs. Slow stochastic has reached overbought area. Crossing moving averages at MACD shows buying signal. One should consider that MACD is slow indicator. Relative strength index is in the middle (53.56) and still has room to grow. S&P500 is likely to test back 500 MA (moving average) at 1082 and then turn positive again targeting north – the area between 200 MA and resistance line. After that another correction is likely.
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