Jul 8, 2011

Where is market headed?

Recent recovery from June 16th bottom has proven to be sharp one, but considering current fundamental data is it sustainable or is just another speculative move for profit taking?
In our recent technical post we noted the broad S&P index as forming second shoulder for the technical formation head and shoulders. This might be the turning point as latest jobs data contradict with recent steep market rise. There is no analyst who will disagree that US labor market is far away from stabilizing. With unemployment rate at 9.2% and 18K jobs added for June the trend is not expected be reversed soon. Jobs creation has to be at least 120K in order to see slow down in the rate. Recent data again question the efficiency of QE2. In theory rising liquidity should support inflation which push down unemployment. Data shows this is not the case now. Is it time for QE3? Although Bernanke firmly denied next round of quantitive easing the ensuring growth is essential for FED and for the whole economy.
Unemployment rate, monthly

Chart source: forexfactory.com
In investment decision one should consider coming earnings season. Despite ongoing consumer deleveraging, which translate to weak labor market, companies are expected to post stronger results with S&P operating earnings at 15% gain on yearly basis and 5% on quarterly (Standard & Poor's predictions). This would limit downside move of the markets. However should expectations seem to be overestimated the downside pressure will be serious firing new doubts about growth and recovery.

S&P long term earnings
Chart source: Standard & Poor's and Robert Shiller
See also:
US Really Getting Out Of Recession? Cross Sectional View Of Key Economic Measures
S&P Technical Outlook

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