Double Dip–Here it Comes

The S&P500 rolled over decisively last week.  It dropped 3.7% on rising volume, which makes the loss more meaningful.  Also adding validity was the VIX (or fear) index which jumped over 19%, preserving the uptrend in volatility that began in late April.

Almost all the economic data were disappointing.  Existing home sales shocked the markets when they fell 2.2%–despite the boost provided by the home tax credit.  The consensus estimate called for an increase of 7.5%.  New home sales fared even worse.  They fell 33% (or 40% from the unrevised prior month) from the revised prior month rate.  The new home sales figure was the LOWEST ever recorded in the history of this series, which began in 1963.  And this rate means that new home sales are 10% lower than they were in the same month last year–2009.  Durable goods orders fell 1.1% when the were expected to dip only 0.5%.  Initial claims were still high, coming in at 457,000.  Finally, the last revision to the first quarter (2010) GDP came in–at 2.7%–well below expectations. 

Technically, the S&P did bounce back to the 50 day moving average, as expected; in fact, it touched 1131.  Now, it looks like there’s a strong probability that the 50 day moving average crosses below the 200 day moving average.  If this happens–next week, or the following week–then the bears in the market will become much more assertive.  And bulls, will look to protect against losing more of their recent gains.  Both of these developments will put even more downward pressure on equities.

The Economic Cycle Research Institute publishes a Weekly Leading Index, which is widely regarded as one of the best indicators of upcoming weakness in the US economic cycle.  On Friday, June 25 the leading index showed a reading  of -6.9%.  This is the same level it reached in December 2007, when the Great Recession first started. 

At this level, the US economy has NOT fallen into a recession only TWO times in the last 42 years of data.  In other words, the odds of going into a recession are extremely high.

And more ominously, if this index falls another 3.1% to reach -10%, then the economy will almost certainly enter into a recession–over the last 42 years of data from this metric, when the Weekly Leading Index has fallen to -10%, the economy has gone into a recession 100% of the time.

So let’s brace ourselves for the very strong possibility that the cheerleaders from our government, from Wall Street, and from the media (think CNBC) are–and have been–dead wrong as they’ve been promoting “green shoots” and the “nascent recovery”. 

It’s becoming increasingly apparent that the best term to describe our recovery is actually “fleeting”, which is exactly what one would expect from a government-induced, inventory-based bounce that, in the long-term, has no legs.

The US economic recovery–from mid 2009 to mid 2010– has been a dead cat bounce.  And so has the stock market rally. 

It’s time to prepare for the double dip.  It’s almost certainly coming.

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