Summary of Recommendations

Remain defensive (cash / money markets) as the market is subject to wild swings as fundamentals deteriorate and the Fed continues to prop up stock prices in roller coaster conditions.

Market Commentary

Stocks drifted lower Monday as a fresh round of corporate deal making was tempered by skepticism about the strength of the economy.

The summer doldrums of August have certainly been at play. The market is struggling the last few weeks to get anywhere. But it is not crashing yet, either.

Frankly, when we look at the daily charts the stock market really hasn’t done much of anything since last May, other than whipsaw in a tight sideways pattern.

However, I wouldn’t read this as anything other than treading water in a sense as investors are clearly preparing for the possibility of a negative GDP report if not in the third quarter, then certainly by the fourth quarter.

This Friday, we will get the revised GDP report for the second quarter. Estimates are for this to be revised lower from 2.4% down to 1.2%. Next month, the final revision could below 1% and pushing near zero, so it should be no wonder the bulls are having a hard time mustering any kind of offense.

The Fed is under the belief that it’s ZIRP (Zero interest rate policy) will prevent a double dip recession from occurring, based on historical precedence.

“The economy has never contracted with the difference between short- and long-term Treasury yields as wide as it is now. That gap, at 2.11 percentage points for 2- and 10-year notes, signals a 15.5 percent chance of a recession in the next year, according to the Federal Reserve Bank of Cleveland.”

This is deceptive and illusionary.

It assumes that banks will lend money because rates are so low. The reality is banks are in terrible shape.

Banks are a canary in the coal mine for the broader stock market! Housing and commercial real estate loans continue to be a nightmare for them.

http://jutiagroup.com/2010/08/20/broken-bank-stocks-a-canary-in-the-market-coal-mine/

While Fed-to-Bank interest rates are low, who wants to borrow on a credit card that charges 20 to 30% interest rates? Credit card debt alone has plunged to the lowest level in almost five years! This essentially stops borrowing and this is exactly what banks want.

http://www.businessinsider.com/surprise-new-credit-card-legislation-pushed-interest-rates-to-22-year-highs-2010-8

Then there are high crude oil prices, which are a form of higher interest rates that drains growth from the consumer and stunts growth and forces the consumer into deeper trouble.

This is being reflected in the Consumer Metrics Institutes Daily Growth Index which measures the demand for goods coming from consumers. If demand for goods is plummeting, the GDP is about to fall, irrespective of low interest rates.

Notice that this indicator tends to lead the BEA’s GDP by a quarter or two. What we already know is the GDP is about to be revised lower to about 1% on Friday, so the direction is clearly established.

According to Consumer Metric Institute, their Growth Index has just fallen below -5% and is approaching the lows of the recession of 2008.

The Fed says there is only a 15% chance of a recession with rates this low. Really? Then why is consumer demand plunging like this, with no signs of a pick up?

We have to acknowledge the risk here and not sugarcoat it.

TECHNICALS

So far the bulls have been able to hold the S&P 500 above the key long-term primary support level at the middle monthly Bollinger Band line. This key support level is now at 1010. It closed today at 1067, only 57 points away.

This is the only major support level that is keeping the bulls in the ball game.

A breach below 1010 would bring on a full blown bear market with hurricane like force as we saw in 2008. Unless the bears can press the S&P 500 below this level, the stock market is likely to continue to whipsaw in a sideways pattern until some proof of growth materializes.

I doubt if that is the scenario before us, but here again the market is the final judge on this matter. Even as powerful as the Fed is I can’t see the Fed holding up the market if the economy is tanking, without another stimulus bill or some other program.

Remain defensive.

Courtesy: Stealth Stocks

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