Maybe the "strong " economy is really just "less weak"
In our technical review of the S&P 500, we noted that the bullish outlook would change if the S&P 500 breaks below 1300. What would cause a break below the 1300 level? One of our concerns is that the markets appear to be married to the idea that the economy is strengthening; to the degree that this strength will generate job growth, income growth, will rescue the housing market and will drive the markets higher.
Our concern is that this outlook is based on a "strong economy" and we believe that a more accurate perception of the economy is that it is "less weak" than it has been. Our concern is further heightened by the fact that job growth is not as strong as first reported by the mainstream media and that the Fed seems not quite so trigger happy to play the QE3 card in the near future.
When we see what we feel are overly optimistic economic reports on the mainstream media, we do some digging to make sure we have all of the facts. One of the areas that causes us to be a bit more cautious on these economic projections is in the manufacturing sector. While there has been positive news in that area, the growth has been in exports to overseas nations like Europe and Japan, where we are projecting a lot of economic softening.
In the recent ISM Manufacturing Index update, while the employment index in the ISM actually rose last period, when we break down the numbers, the percentage of firms that hired new employees actually fell. The other concern we have with manufacturing is that the export index in the ISM just posted one of its largest declines in the last 20 years, which is a real flashing alarm to us. Given that the exports have been the big leaders for this sector and that now we are seeing the largest decline in exports in the last period, we will take a wait and see approach to see if indeed the markets can rally here. If the markets do rally and especially if they do it without the help of a QE3; that would certainly be a bullish scenario.
If the recent jobless news causes the Fed to fire up the printing presses, ignoring the unending negative consequences created by artificially low interest rates and credit creation, then the folks on Wall Street will rejoice because injected liquidity to the stock market is like a shot of heroin to a junkie and the markets, commodities, gold and silver would likely all rally while the US dollar would likely plunge.