Monthly Archives: October 2010

S&P500 Vs. Consumer Confidence

The following commentary and chart is excerpted from the October 14, 2010 commentary.  I find it interesting in a variety of different ways, and it raises a lot of questions with regard to the stock market, consumer confidence, QE1, and QE2…


We have not touched on consumer confidence for a good while, but now is the time.  It’s time because of the certainty of QE ahead.  Again, absolutely key question being, will QE2 positively influence the real economy?  QE I was a strike out.  And what of QE2?  We believe a key indicator to watch as to whether QE2 will transmit to the real economy is the present conditions component of the headline consumer confidence index.  Clearly the aim of QE2 is to inflate asset prices even further, let’s not beat around the bush about it.  QE I inflated financial and commodity prices, but left real world prices of leveraged residential real estate and commercial real estate untouched.  Moreover, QE I did not help headline consumer confidence recover.  We’ll spare you the chart, but headline consumer confidence continues to rest at levels historically consistent with recession.  Very quickly, the headline consumer confidence report is driven by two subcomponents that are present conditions and future expectations.  Historically, the present conditions component of the headline number has been highly directionally correlated with the equity market over time.  You can see exactly this in the chart below.  Of course without the Fed overtly telling us this as a driver of their QE2 decision making, they are implicitly hoping higher stock prices (the assumed wealth effect) will engender accelerating consumer confidence, thereby motivating consumers to borrow and spend (or at worst just spend).  This likewise had to be a key rationale of QE I as the Fed is surely aware of this prior cycle linkage between stock prices and confidence in present conditions.

But what stands out like a sore thumb in the chart above is that the present conditions component of the confidence report never recovered at all even as equities experienced one of the greatest 13 month rallies in history under QE I (exactly as we marked in the chart) from March of 2009 through April of this year.  Moreover, and as is also clear, even as heavy Fed POMO was kicked off in August and September that lifted stocks to their greatest September gain in over seven decades, the present conditions component of the consumer confidence survey continued to deteriorate up through the most recent numbers.  Message being?  At least for now consumer confidence is not being bolstered by financial asset price inflation.  A complete anomaly relative to historical experience.  QE2 is clearly a bet this anomaly will fall back in rhythm with historical experience.  So, we need to intently watch the present conditions component of the consumer confidence report ahead for clues as to whether QE2 will positively impact the real economy through bolstering consumer confidence, or otherwise.”


A Special Note concerning our economic situation is found here

SPX at 1183.26 as this post is written

Updates On Economic Indicators October 2010

Here is an update on various indicators that are supposed to predict and/or depict economic activity.  These indicators have been discussed in previous blog posts:

The October Chicago Fed National Activity Index (CFNAI)(pdf) updated as of October 25, 2010:

The Consumer Metrics Institute Contraction Watch:

The USA TODAY/IHS Global Insight Economic Outlook Index:

An excerpt from the October 28 Release, titled “Latest economic index forecasts weak growth through first quarter” :

“The October update of the USA TODAY/IHS Global Insight Economic Outlook Index shows real GDP growth, at a six-month annualized growth rate, slowing to 1.4% in October and then increasing to 2.0% in February and March, as weak housing and employment conditions continue to impede growth.”

The ECRI WLI (Weekly Leading Index):

As of 10/15/10 the WLI was at 122.1 and the WLI, Gr. was at -6.8%.  A chart of the growth rates of the Weekly Leading and Weekly Coincident Indexes:

The Dow Jones ESI (Economic Sentiment Indicator):

The Indicator as of September 30 was at 40.7, as seen below:

An excerpt from the September 30 release:

“Following five months of modest but steady gains, the Dow Jones Economic Indicator (ESI) fell to 40.7 in September, down from 43.2 in August and its largest one-month drop since October 2008.  And while the Indicator has historically declined in September, there are signs that the economic recovery is faltering with a sharp increase in negative economic stories during the last seven days of the month.”

The Aruoba-Diebold-Scotti Business Conditions (ADS) Index:

Here is the latest chart, updated through 10-23-10:

The Conference Board Leading (LEI) and Coincident (CEI) Economic Indexes:

As per the October 21 release, the LEI was at 110.4 and the CEI was at 101.4 in September.

An excerpt from the October 21, 2010 Press Release:

“Says Ken Goldstein, economist at The Conference Board:  “More than a year after the recession officially ended, the economy is slow and has no forward momentum.  The LEI suggests little change in economic conditions through the holidays or the early months of 2011.”


I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

A Special Note concerning our economic situation is found here

SPX at 1183.78 as this post is written

Market Overview – Part V: Stock Market

(this is the fifth in a series of five posts concerning the markets)

Lastly, a couple of charts showing the S&P500…

First, one that shows the S&P500 on a weekly basis, LOG scale, since 2007.  I continue to find this chart interesting for a variety of reasons.  It shows that resistance has become support, as seen in the blue trendline.  As well, it shows the retracement levels near the middle of the chart, in gray.  Of note, the April high of 1220 is very near the 61.8% retracement:

(click on chart image to enlarge)(charts courtesy of

This 1220 level on the S&P potentially has other significance as well.  This next chart shows what may be a large C&H (Cup & Handle) chart pattern, denoted by the bright green line.   While the price action may not exactly satisfy the requirements for  a classic C&H pattern, the behavior seems to.  As such, I view it as an important consideration, one that would seem to support further strong price appreciation, at least in the short-term:


A Special Note concerning our economic situation is found here

SPX at 1184.00 as this post is written

Market Overview – Part IV: Stock Market

(this is the fourth in a series of five posts concerning the markets)

Starting with my June 2 post I wrote of my expectation for a near-term stock market advance despite what I viewed as highly problematical future conditions.  I continue to maintain this view, albeit with the dangers discussed in the post of October 13, “Comments On The Next Crash“.

Before displaying charts of the S&P500, there are a couple of VIX charts that I find especially notable.  The first, as shown below, is a chart that shows the 10-year Daily VIX chart, LOG scale.   The 20-level continues to serve as an important demarcation, as seen when one compares the VIX in red to the S&P500 below.  As this post is written, the VIX is at 19.85 and has been struggling to stay below this 20-level recently:

(click on images to enlarge charts)(charts courtesy of

This next chart is a weekly view of the VIX from 2003, on a LOG basis.  I find this chart very notable.   The VIX is shown in red, with the S&P500 shown at the bottom.  I have added a few technical indicators to provide perspective.  Perhaps most interesting is the MACD, which is depicted between the VIX and S&P500.  The MACD shows a notable positive divergence (shown by the  red line annotation) since mid-2009:

Now onto Part V, the S&P500…


A Special Note concerning our economic situation is found here

SPX at 1185.62 as this post is written

Market Overview – Part III: Bond Market & Interest Rates

(this is the third in a series of five posts concerning the markets)

The bond market is believed by many to be an asset bubble.  I agree with this assessment, and have written a few posts on the subject.  I discussed when it may “burst” and other considerations in an October 4 post.

The chart below shows the 10-Year Treasury Yield from the mid-90’s on a monthly LOG basis.  As one can see, the yield has been less than 4% since the latter part of 2008:

(click on image to enlarge charts)(charts courtesy of

The next chart shows a one-year daily chart with the 50- and 200-day MAs (Moving Averages).   At 2.55%, the rate is just at the 50-day moving average (shown in blue) and considerably below the 200-day MA shown in red.  From this view, it appears as if there may be some mild upward pressure on rates:

When one takes a slightly different view, by using a 13 and 34 day EMA (Exponential Moving Average) and adds the MACD indicator, however, it appears as if there may be considerably more upward pressure:

A pivotal question at this point is what impact will additional QE (Quantitative Easing) measures have on lowering rates.  As I have previously commented, “One question that looms large is whether any rate-suppression effect that additional QE may have is already “priced into” the market, as additional large doses of QE has been widely expected for a while now.”

Now onto Part IV, the stock market…


A Special Note concerning our economic situation is found here

SPX at 1185.62 as this post is written

Market Overview – Part II: U.S. Dollar, Japanese Yen & Gold

(this is the second in a series of five posts concerning the markets)

I would like to start by featuring a couple of long-term charts of the U.S. Dollar.

U.S. Dollar weakness is a foremost concern of mine.  As such, I have extensively written about it.  I am very concerned that the actions being taken to “improve” our economic situation will dramatically weaken the Dollar.  Should the Dollar substantially decline from here, as I expect, the negative consequences will far outweigh any benefits.  The negative impact of a substantial Dollar decline can’t be overstated, in my opinion.

First, a look at the monthly U.S. Dollar from 1983.  This clearly shows a long-term weakness, with the blue line showing technical support (until 2007) that has now turned into (technical) resistance:

charts courtesy of (click on images to enlarge charts):

Next, another chart, this one focused on the daily U.S. Dollar since 2000 on a LOG scale.  The red line represents both a trendline as well as a relatively good visual “best-fit” line.  The gray dotted line is the 200-day M.A. (moving average).  As seen on this chart, the U.S. Dollar looks vulnerable to continuing its downward trend that has been interrupted since early 2008:

Lastly, a chart of the Dollar on a weekly LOG scale.  There are some clearly marked  channels here, with a large, prominent triangle featured.  Triangles are thought of as “continuation” patterns.  In this case, it would be a continuation of the Dollar downtrend since 2002:

Next, onto the Japanese Yen.  Up until 2-3 years ago, it was widely believed and (commented upon) that a rising Yen was a sign of danger.   This belief seems to have diminished; however, the strength of the Yen has not.  Is the rising Yen still a signal of danger in the markets?  I believe that it is.

Here is the daily chart since 2005 as depicted on a LOG scale.  The 50-day M.A. is shown in blue.  As one can see, there has been a continued string of strong uptrends, and the Yen pricing action is increasingly “parabolic” in nature:

Lastly, a Gold chart.  I have written many posts about Gold.  Of course, the most common question that arises with regard to Gold is whether it is in a bubble, which I have discussed previously.  Certainly, the price action since 2001 would support such a claim.  However, there is much more that should be considered before one can conclude that Gold is in a bubble.

Here is a monthly chart since 1980, as depicted on a LOG scale.  It is interestingly to compare how Gold’s rise has correlated with U.S. “reflationary” efforts over the last 10 years:

Now onto Part III, a look at the bond market and interest rates…


A Special Note concerning our economic situation is found here

SPX at 1183.08 as this post is written

Market Overview – Part 1

This series of blog posts (5 posts) represents a periodic Technical Analysis of the markets.  In this series I will discuss currencies (US Dollar and Japanese Yen); Gold; The Bond Market & Interest Rates; and the Stock Market.

I feel that this is an important juncture in investing for many reasons.  Many markets have experienced strong gains recently, adding to what has been in many cases very strong performances since early 2009.

Perhaps the main question at this point is whether such performance will continue across these markets, i.e. is such performance sustainable?  I continue to be of the opinion that it is not.  As I have commented previously, I view the stock market as experiencing a strong “bear market rally,” one that won’t and can’t continue.   This dynamic of strong yet unsustainable performance is seen duplicated across many different asset classes.  Further, as I have previously commented, my analysis indicates that many asset classes (on a worldwide basis) are full-fledged asset bubbles.  This is admittedly an opinion held by very few.  However, the ramifications of such are immense, both for markets and the economy in general.

While this series of posts will focus on Technical Analysis issues, I will also provide reference links to previous comments I have made on these markets from both fundamental and technical perspectives.

Before displaying some charts, I would like to make a couple of disclaimers.   First,  an extensive overview of all of my Technical Analysis observations would be very lengthy, and it would also infringe upon some facets I consider to be proprietary.  As such, I will limit my observations, but I think most people will still get an overview of my thoughts.  Second, I am aware that many people don’t believe in Technical Analysis.  Even though I use Technical Analysis extensively, I will readily admit it is not infallible.  As readers of this blog are aware, the majority of my focus is on fundamental aspects of the markets and the economic situation.

Now, on to Part II – a discussion of the U.S. Dollar, Japanese Yen, and Gold…


A Special Note concerning our economic situation is found here

SPX at 1183.08 as this post is written

What’s Ahead For The Housing Market – A Look At The Charts

There has been much written as to the future of residential real estate prices.  The consensus appears to be for very slight appreciation for years.  This consensus is echoed in the MacroMarkets September 2010 Home Price Expectations Survey Press Release (pdf).  Here is a chart from that survey that shows the past history (green line) as well as future expectation (red line):

click on chart to enlarge image

As one can see on this chart, real estate prices (here measured by the S&P/ Case-Shiller U.S. National Home Price Index) really started their ascent in the mid-90’s.

Here is another chart, reflecting the CoreLogic House Price Index of July 2010.  The chart is courtesy the CalculatedRisk blog with annotations by John Lounsbury, as noted:

click on chart to enlarge image

In this chart it is again seen that the pronounced ascent in real estate prices began in the mid-90s.  As well, as seen by John’s annotations, the market has experienced a roughly 30% fall from its peak, and a price reversion to the trendline from January 1976 would represent a further 15% decline.

I have written extensively about various facets and dynamics of the residential real estate market.  My analysis indicates that this is a market that is exceedingly complex, due to a variety of hard-to-predict factors.  These factors include such issues as strategic default trends, “shadow inventories”, redefault rates, and the relatively new confusion concerning foreclosure propriety.  As well, there is immense direct and indirect government intervention in this market, which presents further complexities.

Assessing the future path of real estate prices can be done in a variety of fashions; as well, many different measures can be taken into account.  There are reams of data on a myriad of statistics.

For purposes of this post, I would like to focus on the price trends as shown in the two charts above and raise four issues with regard to the future of home prices.  Although I don’t necessarily agree with the methodologies employed by these indices,  they have common acceptance.

The first issue I would raise is whether trendlines can be used to assess the trends of house prices.  The issue is debatable.  Whereas trendlines have proven validity in stock price movements, I would question as to whether such validity exists with regard to home prices.

The second issue is whether such trendlines (assuming their use in housing trends is valid) will serve as “support.”  I would offer that if the housing market is in a continuation of its long-running bull market, the trendline would serve as support.  However, whether we are continuing a long-running bull market in housing is deeply contentious.  My own view on the matter is that the housing market peaked as shown and is now on a decline.  As such, a trendline would likely not hold as support.

The third issue is that of ultimate support; i.e. a price floor.  Some believe that the “pre-bubble” price levels would serve as such a floor.  For example, if one believed that the real estate bubble started in earnest in the mid-90’s, such a level would serve as the ultimate price floor.  This seems logical as, in theory, the price inflation during the bubble’s excesses would be eliminated if the price were to return to the pre-bubble price levels.  However, I think this is erroneous logic on many fronts.  From a “technical perspective” it fails to consider a “reversion to the mean” that would result in a “price undershoot” to a level significantly below that of the prices of the mid-90’s.

The fourth issue is one of “bubble dynamics.”  Of course, the almost universal belief is that the housing bubble has “popped.”  I don’t agree.  As I have previously written, I believe the roughly 30% decline experienced to date, although incredibly damaging, is a “deflation” of the huge bubble as opposed to its “popping.”  Further supporting this idea is that each index has only fallen to levels last seen during a latter year of the bubble, approximately the 2003 period.

This “deflation” vs. “popping” nomenclature is more than semantics.  If the bubble has only “deflated,” as I believe, then the “popping,” and its pronounced accompanying damage, still awaits.

Lastly, one should keep in mind how supportive (ultra) low interest rates have been to real estate prices.   While such low interest rates are widely believed to be stable for the foreseeable future, a substantial uptick in rates would likely prove a significant headwind against the possibility of rising prices.

In summary, while many people have an optimistic view regarding future residential real estate prices, in my opinion such a view is unsupported on an “all things considered” basis.  Furthermore, as discussed, there exists outsized potential for a substantial price decline, unfortunately.

A Special Note concerning our economic situation is found here

SPX at 1183.08 as this post is written

4 Confidence Charts – October 2010

Here are four charts reflecting confidence survey readings.  These are from the site.

I find these charts valuable as they provide a long-term history of each survey, which is rare.

Each survey chart is plotted in blue, below the S&P500:

(click on each chart to enlarge image)

Conference Board Consumer Confidence, last updated 9-28-10:

University of Michigan Consumer Confidence, last updated 10-15-10:

ABC News Consumer Comfort Index, last updated 10-7-10:

NFIB Small Business Optimism, last updated 10-21-10:

As one can see, these charts continue to show subdued readings, especially when viewed from a long-term perspective.

These charts should be interesting to monitor going forward.  Although I don’t believe that confidence surveys should be overemphasized, they do help to delineate how the economic environment is being perceived.

A Special Note concerning our economic situation is found here

SPX at 1180.26 as this post is written

Conference Board CEO Confidence

On October 1, I wrote a post about the Business Roundtable’s CEO Economic Outlook Survey and the Duke/CFO Magazine Global Business Outlook Survey.

Subsequent to that post, the Conference Board released its 3rd Quarter CEO Confidence Survey.   The overall measure of CEO Confidence was at 50, down from 62 in the second quarter.

There are a variety of notable survey results.  Here is an excerpt I find particularly interesting:

“Less than one-third say conditions have improved compared to six months ago, down from about two-thirds last quarter. In assessing their own industries, business leaders’ appraisal was also considerably less positive. Now, only 38 percent say conditions are better, compared with 61 percent last quarter.

CEOs are much more pessimistic about the short-term outlook. Only 22 percent of business leaders expect economic conditions to improve in the next six months, down from 48 percent last quarter. Expectations for their own industries are also downbeat, with about 28 percent of CEOs anticipating an improvement in the months ahead, down from 43 percent last quarter.”


A Special Note concerning our economic situation is found here

SPX at 1173.71 as this post is written