Economic Data Storm Slams The S&P 500 ETF (SPY)

Last weekend we discussed the economic data storm coming up and concluded our report by saying, “This data storm will likely set the tone for the coming weeks and whether or not it will be “risk on” or “risk off.”   Well, the data storm turned out to be a hurricane and by Friday afternoon going into the long 4th of July weekend, it was definitely “risk off” for U.S. markets. 

After Wednesday’s close, we went to “Red Flag Flying” mode, expecting lower prices ahead and our portfolios went to 100% cash on Thursday morning. 

Looking at My Screens 

All major indexes suffered severe technical damage this week as we found the markets declining for seven days in a row. 

As always, the charts tell the story:

 

In the chart above we see that the S&P 500 (Investors looking to play the S&P 500 index can do so through the S&P 500 ETF (NYSE:SPY)) is now well below its 200 Day Moving Average and that the “death cross,” the 50 Day Moving Average crossing below the 200 Day Moving Average, has just occurred.

We can also see MACD on a “sell” signal at the bottom and RSI at oversold levels on the top display.

In the Point and figure Chart of the S&P 500 (Investors looking to play the S&P 500 index can do so through the S&P 500 ETF (NYSE:SPY)), we see that the chart broke a Triple Bottom, generating a “sell” signal and now rests just above the blue Bullish Support Line at approximately 1009.  The Bullish Support line generally provides very strong levels of support and a break through here indicates the onset of a new bear market in Point and Figure Charting methodology.

And finally we take a look at the S&P 500 12 month chart going back to 2000.  You can see how this chart identifies long term trends and that the index has now dipped back below the long term average which is only the 3rd occurrence since 2000.  You can also note that in the previous two instances, significant declines followed this crossover.

In summary, the “chartology” shows us a declining market environment in almost any time frame and methodology.

The View from 35,000 Feet

The economic news last week was mostly all bad.  Here’s a quick review of the positives and negatives of last week’s data storm:

Positives:

Case/Shiller Home Price Index:   Up

Personal Spending:                      Up

Negatives:

Personal Income:                             Down

Consumer Confidence:                    Down

Chicago PMI:                                   Down

Continuing Unemployment Claims: Up

Initial Unemployment Claims:          Up

Construction Spending:                   Down

ISM Index:                                       Down

Pending Home Sales:                     Down

Non Farm Payrolls:                         Down

Factory Orders:                               Down

In addition to the economic reports above, the ECRI, Economic Cycle Research Institute Index continued to decline to a seven month low to -7.7 from -6.9 last week.  Historically when this indicator reaches -10, a recession follows and this index continues its steady approach to that level.

One of the most startling pieces of news last week was the announcement that California will begin paying some 200,000 of its state employees minimum wage until their budget impasse is settled and that the Governor’s edict was upheld by the California 3rd District Court of Appeal. 

State Controller John Chiang is fighting the order on various fronts so quite possibly it will never go into effect but let’s just think about this for a moment.  Here we have our largest state, a state whose GDP is 3% of the world’s and if it were a nation would be Number 8, ahead of countries like Russia and Brazil, struggling with a $19 Billion deficit and its employees possibly earning minimum wage.  We are truly now entering the world of economic science fiction. 

What It All Means 

We don’t have to be economists to figure out that the news was mostly bad and indicates a rapid and unexpected slowdown in the U.S. and global economy.  I was expecting this to occur later in the year but it now obviously has arrived earlier than anyone expected and I think we’ll be seeing rapid adjustments to projected GDP and earnings outlooks by analysts and economists going forward.

In my view we’re looking at a slowdown at best and a double dip recession at worst.  As we discussed last week, one thing that might hold up stock prices through the summer is a good earnings season that begins on July 12th and the other would be renewed action by the Fed to stimulate demand through more quantitative easing and asset purchases. 

The Week Ahead 

It’s a quiet week for economic reports and earnings. 

Economic Reports: 

Tuesday: June ISM Services

Thursday: Initial Unemployment Claims, Continuing Unemployment Claims,

Friday: May Wholesale Inventories

Earnings: 

Wednesday: Family Dollar Store 

Sector Spotlight:

Leaders:  Copper, Base Metals

Laggards: Coal, Heating Oil

Written By John Nyaradi Publisher of Wall Street Sector Selector

John Nyaradi is Publisher of Wall Street Sector Selector and Senior Vice President of Private Client Services for ProfitScore Capital Management, Inc.

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