Sunday, March 30, 2008

Michigan sentiment lowest since 1992. Some very interesting comparisons to that recession.

- Market slides lower on no volume as no shorts rush to cover.
- Income up, spending lower: so what's new when the consumer is worried?
- Core annual PCE falls to 2%
- Michigan sentiment lowest since 1992. Some very interesting comparisons to that recession.
- The stage is set. Time to step up and rally.

Week ends down as buyers are on vacation and shorts see no reason to cover.

The economic data was not bad with income higher than expected and the PCE inflation indicator in line. Throw in an LEH upgrade and investors were feeling pretty good even with JCP (department store) warning on its Q1, providing more evidence of a pensive consumer (along with the 17 month low in spending). Stocks opened higher and rallied into the Michigan sentiment number that was also a low, the lowest since 1992.

After Michigan the market peaked and headed south, starting a long, steady descent through the close without any attempt to rally. The buyers were out for the weekend, and with no bids the shorts had no compulsion to cover. So much for getting the short covering pre-weekend bounce we wanted.

Financials were once more the hardest sellers. Oil (104.95, -2.63) and gold (930.60, -18.20) sold rather sharply, but there was no solace taken; even the transports slumped on lower prices for fuel feedstock. The market sagged to the close and the indices undercut the 18 day EMA. Not great action, but it was no implosion, no dive back into the chasm.

TECHNICALLY the intraday action was modestly higher to losses in the 0.6% to 1% range. High to low action is not great, but you have to look at the other indicators to see if the action has any fire inside.

INTERNALS: Breadth ran modest all session before falling off right at the close to -2:1 on both NYSE and NASDAQ as they again matched each other. It was modest enough to indicate there was no widespread exit. Volume told the same story, i.e. no sellers dumping shares in any quantity, just a lack of bids to end the session.

CHARTS: The indices did not hold the 18 day EMA, did not bounce. The move through that level is disappointing, but it was no breakdown. All of the indices are still in a range they can hold, make a higher low, and continue the rally attempt. SP500 and NASDAQ turned back at the 50 day EMA where SP500 failed in late February, just a month back. As noted Thursday, this is the point where they need to put up.

LEADERSHIP: This remains the most interesting aspect of the market. It was bifurcated on the week, but not a bad bifurcation where some leaders hold up and others break down. Some of the early runners are pulling back after good surges such as in transports and retailers. They are coming back but still holding support. At the same time, other solid companies see their stocks forming up nicely despite the overall market pullback. Tech is an example. These are really a positive as it shows money is still moving into these stocks despite the market pullback. Groovy.

IN SUM: This is the kind of drop that gets most everyone assuming another selloff is coming. People are not that comfortable with the market action given no signs of upside life after Monday. Friday we heard some old hands on the floor fearing another collapse lower for a number of reasons, e.g. a low volume rise off the lows. There were no less than six commentators Friday who said this was the toughest market, the scariest market, the most unpredictable market they had ever witnessed or had encountered over the past thirty years.

We have to admit that you always have doubts about a move that sells and then sells some more when the market is trying to recover. This pullback still seems too short and too shallow to account for all of the problems with housing and credit. Just doesn't seem to be enough of a flush out even with the Fed in the game. What you have to look at, however, is what the market is telling you. Is there anything more than just the sag back (yet again) that has everyone glum?

In this case, yes. The last rise off of the March lows was not on lighter volume. NYSE volume moved above average on that run, showing there was real buying off of that low. NASDAQ volume was spotty, but NASDAQ stocks are still setting up for leadership; NYSE stocks were definitely leading and that is where the money was going. Leadership as noted is not caving in, just pulling back to test while at the same time other leaders are developing for a break higher. Breadth shows no widespread selling, just parts of the market pulling back, some to test, others (such as financials) to try and find themselves again.

This is one of those times it is hard to be positive given the selling preceding the current pullback, but the market is not distributing after the bounce off the last March low. There is the big positive of leadership; even as the market pulls back the early leaders and the newly minted ones are holding up well as other stocks set up for upside moves. That completes the picture: higher volume on the move off the March low, lower volume on this pullback, and leadership holding the line, still setting up nicely. That means we are looking for the market will to soon turn from this pullback and continue the break higher . . . barring some big extraneous news story. With the credit issues still out there, that is always possible.


Spending continues to slow but is not off the cliff.

Income beat growth expectations at 0.5%, pushing annual income to 4.6% year/year. Spending was up the 0.1% expected. Even with that more modest rise, annual spending growth rose 5.1%. The PCE rose 3.4% annually overall, and the core 2.0% year over year, back at the top of the Fed's target range.

With oil surging out of control still and food prices still rising, there is little solace from the lower annual core PCE. Those are of course beyond the Fed's control and its monetary policy reach, and with the Fed in full 'prime the pump' mode there is no concern about the Fed using those as a wedge to get back into the tightening game.

What is a sign of the times and worrisome is inflation adjusted spending (70% of the GDP) that was flat in February and indeed flat for the last three months. That high energy cost, weakening home prices, and general worries about jobs are wearing on consumers. When it costs $60 for 20 gallons of gas that is hard on consumers. I hire college students to help do some of the office work and to train them and groom them for later on, and to a man (or woman as the case may be) they are complaining how the rising gasoline costs are eating away their earnings. It is a real hardship, and on top of that, with more money going into the tank, less money goes elsewhere.

Michigan sentiment at recession levels. Well, at least one recession level.

Even with that, spending is still remarkable, holding flat even as prices climb and confidence falls. The latest read on the consumer mindset was Friday with the March revised Michigan report. Sentiment fell to 69.5 from 70.8 in February, less than the 70.0 expected. Still stronger than the Conference Board's read but it is at a level not seen since the 1992 recession.

Interestingly, when confidence was at this low level the economy was pulling out of the recession. Indeed, in the spring of 1992 the economy was on the comeback from a quite light recession even though, during a political year, it was characterized as the worst recession since the Great Depression. A lot of manure is thrown in a presidential campaign year, and that was one of the biggest buckets ever. Of course, the electorate bought it even as there were robins on the yard as far as the economy is concerned.

Interesting Recession Comparisons.

The similarities to past financial-based recessions are intriguing. Of course sentiment is heading lower still, but it doesn't take much to turn it if things improve. The stock market shows building leadership as it tries to build off of a nascent double bottom after five months of selling. There are hardly robins on the yard in terms of the economy, but the Fed is in full inflation gear and the Feds have already passed a stimulus package. There are also some tall tales being told with respect to how to handle the mortgage issues (e.g. 5 year moratoriums), trade protectionism, etc.

If the market can continue higher and leaders continue to build, it is a leading economic indicator, and perhaps this recession will be as shallow as in 1992 and the bear market of 1998. I noted at the end of 2007 and in January 2008 that this could be a shallow recession. P/E ratios were pretty tame heading into this recession, the Fed and the Feds were in quickly as noted, and financial crises can end quickly as seen in 1998 with the Russian meltdown that saw the SP500 plunge 22% in 4 months, making a double bottom and rallying higher. The current decline that is trying to double bottom is 5 months long and sports a 20% decline. DJ30 lost 21% in the 1998 recession; the decline on this low was 18%. NASDAQ is not as close; it collapse 33% in 1998, but is down 'just' 24.7% on this drop. P/E ratios, as noted however, were already in a reasonable range heading in, and thus the losses are plenty to support a recovery.

Financial crisis helped trigger this decline as in 1998. There is more here what with housing, so it is not a one to one comparison. The percentages are a bit off, but they are close. The Fed was a big actor back in 1998, and it is a big actor right now, and, despite the complaints, it acted in rather short order. Leadership fell hard, but it recovered with good bases in 1998, and we are seeing similar action here. There are parallels, there are some differences. There are enough of the former to make this very interesting, and this attempt to double bottom will tell the tale as to just how similar.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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