It is with great thought and new information that I must make an adjustment to this year's 2008 economic forecast as technical action in the Dow Transports (TRAN) and April's leading economic indicators from The Conference Board strongly suggest that the U.S. economy will experience "modest economic growth" for 2008.
While it had been my (Jeff Bailey's) end of 2007 forecast that the U.S. economy would witness a "modest recession" in 2008, I'm now seeing enough signs from both economic and more importantly technical action, that suggest the U.S. economy may well experience modest growth for 2008.
Much of tonight's market wrap will be a review of past commentary made in my market wraps and OptionInvestor.com Market Monitor postings, but I think it important that trader's and investor's BIG PICTURE hypothesis be shifted.
As you and I review some of today's internal action (see above table), my mindset is that today's action was largely PROFIT taking by bulls, where some handsome profits were taken as the "good news" expected now comes to fruition.
Let's first begin with today's 10:00 AM EDT release of April's leading economic indicators, where after a mixed-to-higher opening trade, stocks extended gains from last week's May option-expiration as April's leading indicators were released.
A quick review may be needed here, as it is important for us to have a basic understanding of the ten (10) leading indicators measured by The Conference Board, and how these indicators are weighted.
Just as many of the EQUITY indexes are weighted, with some stocks have "greater weight" than others; The Conference Board's leading indicators are also weighted.
In the above table, I've marked from #1 thru #5 the various "indicators" The Conference Board weights when establishing the leading indicators, where M2 Money Supply, which most economists use when looking to quantify the amount of money in circulation and average weekly hours worked by an employee in the manufacture of goods comprise more the 1/2 (0.3550 + 0.2552 = 0.6102) of the leading indicator index. That's just more than 61%.
As a market technician, I've always held the belief, as do many technicians, that the S&P 500 (SPX.X) 1,426.63 +0.08% is an EXCELLENT depicter of the U.S. economy. For many a market technician like myself, it is perhaps #1 on our list of charting the market's perception of the U.S. economy.
What looks to have driven buying at the 10:00 release was more than likely the observation that with two (2) months of gains from the leading indicators now revealed, that pretty much put the proverbial "wrench in the engine" to the thought of a severe recession, if not a shift towards modest growth from those that had forecast a modest recession.
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For a modest recession to have taken place in the first-half of 2008 as I (Jeff Bailey) had forecasted at the end of 2007, I would have, or was looking for more negative measures in today's release.
April's 102.00 measure showed a 0.1% increase over March's 0.1% increase and was stronger than economists' forecast of unchanged.
Here's a quick look at how the leading index of economic indicators have come in since October'07. While April's 102.0 reading is preliminary, and subject to revision, M2 money supply remains steady at record levels (a positive), and while the average hourly workweek fell to 40.9 hours from 41.2 hours, the slight negative for less overtime pay is offset somewhat that "wage inflation" pressures may be easing.
The primary reason M2 is so heavily weighted and a major focus of economists and investors, is that it is THIS CAPITAL that can flow into various investment vehicles. It can also be used to pay down debt, like revolving credit (a component of LAGGING indicators)!
Leading Indicators - Oct'07 thru Apr'08
The Conference Board noted today that of the ten (10) leading indicators, six (6) of them (including stock prices), interest rate spreads (10-year yield - fed funds target) and building permits increased.
Just as an economist might view average weekly hours with mixed analysis, I could see the same for building permits at today's close.
While it may be a slight "positive" to see building permits rise for the first times since Nov'07, I could also view the increase as a "negative" in that the U.S. is still struggling with on oversupply of EXISTING homes for sale.
In the above table, I've place a 1.82 in the 05/19/08 "Interest Rate Spread" and a 1,401.04 in the "Stock Price (500)". I will touch on both of these observations later this evening, but they are simply measured with the 21-day SMA.
The "Interest Rate Spread" provides my focus as to the benchmark 10-year Yield ($TNX.X) minus the current fed funds target of 2.00%.
I should make note that the PINK "Mfg. New Orders" or #4 weighted measure is (mil. 1982 dollars), while #10 weighted is (mil. 1982 dollars) of nondefense capital goods.
For full release I suggest reading the full text of The Conference Boards release at this link.
Closing U.S. Market Watch - 05/19/08
There are probably three (3) main points I want to review, or bring some attention back to in tonight's market wrap.
First is the Dow Transports (TRAN) 5,395.40 +0.49%, which did trade a new all-time high today at 5,536.57.
Dow Transports (TRAN) - Daily Intervals
The TRAN's decline earlier this year was BEARISH for Dow theory, where the TRANSPORTS weakness strongly suggest some type of economic contraction, or slowing. In late March, the TRAN began showing some notable strength.
Bottom line here is that under the backdrop of a RECESSION, the TRAN should NOT have traded an all-time high. It did today!
I do think traders/investors that have ridden this wave of bullishness should be protective of gains.
A "conservative" objective of the head and shoulder bottom pattern using 4,150 as the "head" and 4,900 as the mid-point of the descending neckline would be 5,650.
Objectives for head/shoulder patterns is to take the difference between the head and the neckline, then ADD that difference to the neckline (for h/s bottoms), or SUBTRACT the difference to the neckline (h/s tops).
Some Dow theorists will use the TRAN as a LEADING technical indicator of the economy.
10-year Yield ($TNX.X) Chart - Daily Intervals
Today's leading indicators also showed the #3-most heavily weighted measure of "10-year less fed funds target" as improving for the third-straight month.
Just as I've drawn attention to the NEGATIVES of money flowing INTO treasuries as DEFENSIVE posture from the market, the OUTFLOW of cash can signal a more "willing to take some risks" into other asset classes. From a LEADING indicator measure, we can also see that the RISE in the 10-year moving FURTHER above the current fed funds target of 2.00% may be a LEADING indicator that the fed may start a TIGHTENING bias.
Why does the fed RAISE RATES? One reason is economic GROWTH! Inflation is also a concern, and we've been inundated with oil prices as a primary concern.
S&P 500 Index (SPX.X) - Daily Intervals
Earlier this month I did indeed urge "caution" for new bull entries as the major averages, including the SPX.X tested its DOWNWARD trend, then its 150-day SMA.
I've seen enough and I'm pretty sure "severe recession" bears have too..
I believe strongly, based on observations, that MARKET PARTICIPANTS will be making some ADJUSTMENTS and turn more BULLISH.
Look for BUYING OPPORTUNITY on any near-term profit taking at 1,390, with MAJOR
SUPPORT at the 1,365 level.