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Leading indicators not really leading

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Stocks are just off their best levels of the morning session with the Dow Industrials (INDU) up 110 points at 8,732 after an earlier morning high of 8,744, while the broader S&P 500 Index (SPX.X) trades higher by 11.5 points at 926, which is right near its session high of 926.43. The NASDAQ Composite (COMPX) 1,449 gains 30.5 points and breaks to a four month high and trades levels not seen since early July of this year.

All this bullishness builds after stronger-than expected earnings from Hewlett Packard (NYSE:HPQ) $19.00 +12.75% and a labor market that looks to at least be holding its own and stabilizing.

This morning's 10:00 AM release of October's leading economic indicators came in unchanged, which was slightly better than the -0.1% decline forecasted by economists. The Conference Board, which tabulates and reports the data said the coincident index and the lagging index were also unchanged in October.

September's -0.2% decline for the leading indicator index was revised lower to -0.4%.

The three indexes were designed to forecast and confirm turning points in the economy, where a deep and protracted decline in the leading index often times accurately forecasts most recessions.

With October's data tabulated, the leading index is down -0.2% in the past six months, far above the -3% decline that most economists see as the red flag level for a pending recession.

October's leading indicators had 10 indicators showing positive gains, led by money supply, jobless claims, core orders for capital goods, building permits, interest rates and orders for consumer goods. Those indicators that were lower had consumer expectations, vendor performance, factory hours and stock prices.

Ken Goldstein, an economist at the board said, "The leading indicators are not pointing to a more positive outlook at this point. Only consumption has consistently fueled the recovery through the first 10-months of the year. If the profit recovery continues, there is at least a chance for investment to start picking up."

Hmmm.... that sounds familiar to me (Jeff Bailey) and perhaps other subscribers. A quick look at the deeper cyclicals as depicted by the Morgan Stanley Cyclical Index (CYC.X) has that group higher by 9.6 points at 451.93, or +2.17% in this morning's session. It has been my thought this would be a group that would lead technicals higher as investors perceived growth at the bottom line of these company's, and when growth was found, many of these company's would begin increasing the capital expenditures and technology stocks would then benefit.

However... as some technology sectors break to some multi-months highs, the deeper cycilcals, which tend to lead in an economic recovery, while well off their lows of 370 (+22% from October lows) are lagging some of the more impressive gains found recent in technology.

I do think today's leading economic indicators at least hint if not partially confirm some things mentioned in last night's Index Trader Wrap. Technology stocks are simply trying to play some catch up and narrowing of percentage loss gaps suffered over the past couple of years and most likely continue to benefit on a greater scale from aggressive short-covering by bears as some still handsome longer-term gains by bears are at risk.

We're seeing some bullish action for equities also present itself from the bond market today. The benchmark 10-year Treasury YIELD ($TNX.X) has broken above the 4.15% YIELD level here at 4.185% and this has last night's identified reverse head/shoulder pattern on this bond's YIELD in play. Also bullish for this YIELD (bearish for the bond) is that this bond's point and figure chart of YIELD, set at 0.5 scale, shows this bonds YIELD triggering a triple-top buy signal on yield, and also breaking above the bearish resistance trend. I view this as quite bullish for YIELD call bulls, and also portends bullish things for equities in the weeks to come.

If anything, today's technical action in the Treasury YIELD side of things will keep "new bears" very cautious with cash being freed up from Treasuries, and the technical indications hint it could continue over the next couple of weeks.

Jeff Bailey

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