Get Ready for a Double Dip
Courtesy of John Nyaradi’s Wall Street Sector Selector
In my view, it’s becoming increasingly likely that we’re rapidly heading towards a double dip recession. It won’t be tomorrow or this week or even next month, but many warning flags point towards significant deterioration in the U.S. and global economy going forward and so I think that by the end of the year or early 2011, we could very well be facing a new leg down in the world’s economic situation.
We’ll take a look at some of the factors at work but first let’s take a look at the past week and where we stand at Wall Street Sector Selector.
Looking at My Screens
Obviously the volatility that has come back into the markets in recent weeks was in play last week as the Dow experienced its third worst drop of the year on Friday, fast on the heels of Wednesday’s rocket ride up.
This week’s action took our Standard, 2X and Option Master Portfolios to 100% cash as we took profits and cut losses during the week.
Currently our portfolios look like this year to date:
Sector Selector Standard: +7.5%
Sector Selector 2X: -17.8%
Sector Selector Option Master: +47.1%
This week’s positions were closed for the following gains/losses:
VXX: +50.3%
EFZ: +2.8%
YXI: -8.5%
PSQ: -5.3%
EEV: +5.9%
SKF: -12.9%
December S&P Put Option: +29.7%
We remain in the “Red Flag Flying” mode, expecting lower prices ahead. However, almost incredibly, our indicators are moving towards a new “buy” signal that we might see confirmed within the next days or weeks.
A quite likely scenario is a relief, short term rally through August-September, followed by further declines into 4th Quarter and next year.
Whatever happens, we will continue working both the “long” and “short” side of this market that remains unbelievably volatile and challenging.
The View from 35,000 Feet
This week’s action was driven by conflicting forces but ended largely negative, with the S&P 500 unable to break through its 200 Day Moving Average. As we’ve said before, this average is widely viewed as the demarcation line between bull and bear markets, and until or if the major indexes are able to sustain positive momentum above this line, we can consider that we are in a bear market, at least for the short term.
The big catalyst for Friday’s sell off, of course, was the Non Farm Payrolls report that came in far weaker than expected at 431,000 versus a whisper number of 500,000. Adding to the worries was the fact that only 41,000 of these new jobs were “real” private sector jobs, with most of the rest coming from temporary census workers.
Further worries were the Euro hitting a four year low, Hungary saying that their situation was “very grave,” and less than robust reports in consumer spending, pending home sales and factory orders.
More troubling in my opinion was the ECRI (Economic Cycle Research Institute) report of its weekly index hitting a 43 week low and its annualized index hitting a 50 week low. This is a highly accurate leading indicator of U.S. economic activity and points ominously towards the double dip recession that we’ve been considering.
Also at this week’s G-20 meeting, Treasury Secretary Geithner called on the Europeans to adopt the “American fix” to current problems by increasing government spending and quantitative easing to stimulate growth but he was firmly rebuffed by European leaders who are going instead for deficit reduction and austerity programs over fiscal stimulus.
What It All Means
Looking over the past year’s growth and stock market rally, we see a liquidity rally fueled by stimulus and various bailouts, and as those draw to a close, the question of the hour is whether or not this economic growth has become self sustaining or not.
Many experts expect a natural slowing as these programs are removed from the system and the situation in Europe can only be a tremendous drag on the global economy as the Eurozone retrenches and cuts their spending and consumption.
It seems that, unlike us, the Europeans are willing to take their medicine now and resolve their problems rather than “kicking the can down the road” as we’ve done in America. Of course kicking the can sidesteps current pain but will only serve to make the “day of reckoning” worse because the piper will still demand to be paid.
The Week Ahead
Economic Reports:
Monday: April Consumer Credit
Wednesday: April Wholesale Inventories, June Fed Beige Book
Thursday: Initial Unemployment Claims, Continuing Unemployment Claims
Friday: May Retail Sales, June Michigan Sentiment Survey, April Business Inventories
Sector Spotlight:
Leaders: Short Financials, Short Europe, Short Small Caps
Laggards: Oil Services, Italy
Wishing you a great weekend wherever you may be,
John
John Nyaradi publishes Wall Street Sector Selector, an online newsletter specializing in sector rotation trading using Exchange Traded Funds. John is offering readers a 30 Day Free Membership and Free Special Report, "Slay the Dragon Within: How to Make Your Emotions Work for You Instead of Against You." His service provides signals for going long and short using standard and leveraged ETFs. Free Membership Subscribers also get access to the Wall Street Sector Selector Monthly Webinar and a second Report, "How To Avoid the Buy and Hold Trap." – Ilene
