The S&P limped across the finish line gaining 0.4% last week, but almost losing this gain on a sell-off on Friday. Interestingly, the small cap index, the Russell 2000, lost almost 1.2% for the week, and the Dow transports fell even harder…..losing 2.3%. Short-term volatility sagged over 2% taking the VIX back down to the mid-teens, or about as far down as it ever goes.
Also interesting were the breadth indicators. Almost all of them deteriorated. The McClellan Oscillator fell hard. The NYSE new highs minus new lows also dropped. The NYSE advancing volume minus declining volume fell. It seems like the rise in the S&P was driven by several large cap leaders; meanwhile, most of the other “soldiers” in the stock markets struggled. This is not a good sign. And when the severe negative divergence of the Dow transports is factored in, bulls ought to begin to worry about the sustainability of the recent rebound.
Other traditional technical data are still somewhat bullish. For example, the uptrend on the daily charts is still holding. But momentum is weakening and starting to diverge bearishly.
Meanwhile, the US economic slowdown is becoming so apparent that even the mainstream media is having a hard time ignoring it. Last week, retail sales (both headline and ex-auto) plummeted. Existing home sales badly missed expectations (and lately, housing was supposed to be the one bright spot in the economy). Initial jobless claims, sure enough, after the effects from the July 4 holiday week faded, soared back up to the near 400,000 level. The Philly Fed missed and leading indicators also fell hard. Several well-respected economic forecasting groups, such as the ECRI, are openly declaring that the US is already in recession, and that it will take 6 to 12 months for the NBER to formally declare that it began in mid-2012.
But what about the stock markets? Will they echo the big corrections of 2010 and 2011, when the S&P fell about 17% and 19% respectively?
Actually what’s more surprising is that the S&P hasn’t already fallen and by even more than the 19% we saw in 2011.
Because the US economy appears to be slowing down more dramatically today than it did in the late spring of 2010 and 2011. This will inevitably lead to lower corporate sales and earnings. And this in turn will put pressure on stock prices.
So why hasn’t the S&P plunged?
Well aside from the consensus of hope based on the Fed coming to the rescue, it seems that the timing is simply off by a few months, when comparing 2012 to the prior two years. Over the next 60 days, US corporate earnings guidance for the third quarter and the rest of the year will come under tremendous pressure.
Because corporations and analysts have been pushing out the rebound in earnings for 2012 to the fourth quarter. While earnings growth in the first, second and now third quarters have been getting crushed, there’s been a huge shift of expectations into the last, or fourth, quarter when firms will “make up” and year-to-date earnings shortfalls.
And that’s the problem. Because, essentially firms and their analysts are betting on a Hail Mary pass to make their years. And the odds are not good that this pass will be completed.
Finally, the last time that the fourth quarter was supposed to “save the day” was 2008…..when not only did the fourth quarter not save the day, but it went on to collapse…..taking stock prices down with it.