The US markets fell 1.5% last night after rallying a similar amount the previous session. This is a clear indicator of a market in trouble.
The market rejoiced on Friday night after the US GDP figures came in at a better than expected 1.6%. The market ignored the fact that the expectations for the figure had to be ratcheted down twice from 2.5% to 1.4% recently so that they could come in under the released figure.
Looking forward, the expectations are that 3rd quarter GDP will be in the neighbourhood of 2.5%. What a joke. I would not be surprised at all to see the 3rd quarter return to negative growth and that would mean that current top down forecasts are ridiculously high.
As Mike Shedlock points out in his global economic analysis blog, at this stage of a recovery, four quarters following a bottom in GDP, growth is usually running at a 6% annualised pace. Instead the US is limping along at a 1.6% pace after 5% real GDP growth in the fourth quarter of last year and 3.7% in Q1. Join the dots and it is quite clear that the US economy is approaching stall speed.
Technically, last night's fall in the market is a clear warning signal that the previous session's strength was purely short covering and a misguided interpretation of the GDP figures.
If you have a look at this chart of the S+P 500 you can see that we are approaching the bottom of the range from the past year. The short, intermediate and long term trends are all pointing down now and we have already soaked up a lot of buying support over the past four months to keep us above this key 1010-1040 area.
You can see that the current short term trend is hugging the 10 day Moving average at the moment showing that we are in strong downtrend. A failure under this 1010-1040 area is going to see not only the capitulation of stale bulls from the past four months, but also capitulation from all of the long and wrong positions of the past year.
This will be the moment when no one can deny that the rally of the past year and a half is dead and buried and that the secular bear market that we have actually been in since 2000 is continuing. This is despite the US government and Ben Bernanke and his cohorts throwing everything including the kitchen sink at the problem.
Memories of the crash are still fresh in people's minds and it will not take much to see the panic take hold again. I would expect to see a fairly quick move towards the low 900's in the S+P 500 from here if 1010-1040 can't hold. By quick I mean within the next few months.
Friday sees the release of the Employment figures in the states and if the recent figures are anything to go by it will not show any pick up in employment which is a necessary catalyst for an improvement in the economy.
The bond market is showing signs that it thinks the US is already in another recession. The Japanese Yen is going through the roof and is showing that big investors are repatriating funds and lowering their risk exposure.
It appears that the equity market is sitting on its own as being optimistic about the future prospects of the economy. I don't think it is long until that shoe drops as well.
I would be even so bold as to say that last night price action has set the market up for another steep fall in the next day or so. Below 1040 in the S+P 500 is a danger zone and I think this time the moons are aligned for the market to retreat from the maginot line at 1040 and scurry off into the bushes.
I have been sending out warning signals to my Slipstream and Swarm subscribers and I invite you to have a look at a weekly video that I send outlining the major world markets and where I see them heading based on my technical indicators. I am very protective of my subscriber's interests and showing this information for free will not become a regular event, but I think it is ok to give you a quick look under the hood.
Click on the image below to watch the Slipstream Trader market update:
Murray Dawes
Editor, Slipstream Trader
for The Daily Reckoning Australia
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About the Author
Murray began his career on the Sydney Futures Exchange trading floor in 1993 with Swiss Banking Corporation (SBC). He spent a couple of years in the 3 and 10 year bond and option pits before moving on to the Share Price Index (SPI) futures and options pit. From there he became a broker with SBC specialising in SPI futures and options to institutional clients. After leaving SBC Murray continued his career in broking at Bankers Trust Australia.
Then in 2001 Murray moved to Melbourne to work as a hedge fund trader for one of Australia’s wealthiest families. In 2003 he was ready to set up his own firm providing the same proprietary technical trading system to some of Australia’s boutique hedge funds. The success of Murray’s system led to him trading a $10 million account for a high net worth individual. This involved trading Australian and US futures and Australian stocks. Now Murray heads up the technical analysis desk for us passing on to readers some of his experience from 16 years of trading.
