Believe the Markets Or Economists and Big Picture Theorists?
Saturday, December 3. 11:30 a.m. Stock markets are not perfect in forecasting the economy, but they’ve got a better record than economists and analysts. That’s why technical analysis of markets, spotting reversals of money flows and momentum, the support/resistance levels of ongoing trends, and so on, is so important in investing. The market rolled over [...]

Saturday, December 3. 11:30 a.m.

Stock markets are not perfect in forecasting the economy, but they’ve got a better record than economists and analysts.

That’s why technical analysis of markets, spotting reversals of money flows and momentum, the support/resistance levels of ongoing trends, and so on, is so important in investing.

The market rolled over to the downside at the end of April, and the S&P 500 was down 20% at its October 3rd low. And it wasn’t all due to savvy investors stepping aside based on the market’s seasonality history.

It was also that, in spite of the continuing positive economic reports, the market sensed the U.S. economic recovery was stalling and would reverse. But economists did not see that as even a possibility. Their forecasts were that the economy was continuing the improvement that began in June 2009 when the Great Recession ended. By extending the trend of the previous year they expected an even stronger year this year, with GDP growth to top 4% for the year.

When the economic reports during the summer began to justify the market’s concern, including the shocking revision to previously reported 1st quarter GDP growth down to just 0.4%, economists were still reluctant to lower their forecasts.

However, as the reports continued to worsen, by the time the market was down 20% at the low in early October, the consensus was that not only was the economy in trouble, but with the re-emergence of the eurozone debt crisis, recession was in the cards and an economic disaster was even possible.

Not very timely information for investors with the market already down 20%.

And the market did not agree with the new assessment of economists.

It launched off that October low into an impressive rally.

Was that reversal entirely due to seasonality, savvy investors jumping back in to take advantage of the market’s historical seasonality on the upside?

Partially. But also, while economists had finally caught up to the previous reality of the slowing economy, and were now extending the downward trend of the summer into the future, the market was sensing the economic slowdown was bottoming.

And as economic reports have been coming in for October and November they have indeed shown that probability.    

With that as background let’s look at the market drama of the last month.

After experiencing the best October in years, global markets plunged in November and appeared to be heading for the worst November in years, on fears that the eurozone’s new efforts to rescue itself from its debt crisis were doomed to failure.

And with its November plunge the stock market seemed to be sensing that was true.

By a week ago yesterday, the Dow had declined 1,000 points from its late October level, and headlines were of the doomsday variety. But the short-term charts were showing the market was deeply oversold, for instance beneath 21-day moving averages, and at the potential trendline support of a rising trading band.

Eurozone officials went into emergency meetings last weekend and emerged last Sunday with a plan for additional rescue efforts. 

Economists and analysts were quick to jump on it as not enough and doomed to fail.

But European and U.S. stock markets soared on Monday, the Dow closing up 291 points, or 2.6%. European markets, much closer to the crisis, showed even more confidence, the German DAX closing up 4.6% and France up 5.5% on the day.

On Wednesday when global central banks joined the rescue effort with their co-ordinated effort to put a safety net under European banks, pundits were immediately on top of that as a sign of desperation, indicating the situation is even more dire than thought, and that the effort was meaningless and would not make enough difference in the debt crisis.

But again, global markets thought differently. The Dow surged up an additional 490 points, or 4.2%, the German DAX closed up 5.0%, France up another 4.2%.

And this week’s economic reports provided still more evidence that the economic slowdown has bottomed and recovery is underway.

They included that Construction Spending was up 0.8% in October, the Chicago PMI Index jumped to 62.6 in November from 58.4 in October (to its highest level in 7 months), and the ISM Mfg Index rose to 52.7 in November from 50.8 in October, all reports stronger than economists’ estimates. In addition it was reported that Pending Home Sales surged up 10.4% in October.

Then there was yesterday’s Labor Department report that 120,000 new jobs were created in November in spite of 20,000 more government layoffs. More important to the changing trend new jobs in September previously reported as 158,000 were revised up to 210,000, and jobs in October were revised up from 80,000 to 100,000. And the unemployment rate declined to 8.6% from 9.0%.

However, this weekend the headlines and opinions are still skeptical at best. The drop in the unemployment rate is suspect. The optimism of global markets is unfounded.

But I suspect it will continue to work better to let the markets and technical indicators provide the intermediate-term forecasts for the economy. They get it right more often.

And even did so with the short-term support and resistance areas of the markets.

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Longer-term the pessimists may be right. But profits in the markets are made in the intermediate-term market moves.

So we shall see.

To read my weekend newspaper column ‘It’s Time To Dump U.S. Treasuries Again!’ Click here.

Subscribers to Street Smart Report: In addition to the charts and updates in the ‘premium content’ area of this blog this morning, the new issue of the newsletter and a hotline are in the subscribers’ area of the Street Smart Report website from Wednesday evening. And we’ll have an update of our regular ‘Global Markets’ report, and an update of our regular ‘Gold, Bonds, Dollar, Inflation’ report early next week.

Yesterday in the U.S. Market.

A mixed, basically flat day on low volume going into the weekend. But no give back of the big gains of the first four days of the week.

The Dow and S&P 500 closed down less than 1 point, not measurable as a percentage. The NYSE Composite closed up 0.1%. The Nasdaq closed flat. The Nasdaq 100 closed down 0.3%. The Russell 2000 closed up 0.6%. The DJ Transportation Avg. closed up 0.8%. The DJ Utilities Avg closed down 1.0%.

Gold closed up $5 an ounce at $1,745 an ounce.

Oil closed up $0.78 a barrel at $100.98.

The U.S. dollar etf UUP closed up 0.3%.

The U.S. Treasury bond etf TLT closed up 1.4%.

Yesterday in European Markets.

European markets not only held onto their big gains of the first four days of the week but added to them yesterday. The London FTSE closed up 1.2%. The German DAX closed up 0.7%. And France’s CAC closed up 1.1%.

Global markets for the week.

A big turn-around in a super positive week.

THIS WEEK (December 2)
DJIA12019+ 7.1%
S&P 5001244+ 7.4%
NYSE7453+ 8.0%
NASDAQ2626+ 7.6%
NASD 1002302+ 7.1%
Russ 2000735+10.3%
DJTransprts4946+ 9.1%
DJ Utilities443+ 4.1%
XOI Oils1,224+ 9.9%
Gold bull.1,745+ 3.9%
GoldStcks202+ 7.8%
Canada12075+ 5.3%
London5552+ 7.5%
Germany6080+ 10.7%
France3164+ 10.8%
Hong Kong19040+ 7.6%
Japan8643+ 5.9%
Australia4346+ 7.1%
S. Korea1916+ 7.9%
India16846+ 7.3%
Indonesia3779+ 3.9%
Brazil57885+ 5.4%
Mexico36756+ 6.3%
China2473- 0.8%
LAST WEEK (November 25)
DJIA11231- 4.8%
S&P 5001158- 4.7%
NYSE6898- 5.3%
NASDAQ2441- 5.1%
NASD 1002150- 4.6%
Russ 2000666- 7.4%
DJTransprts4533- 6.4%
DJ Utilities426- 3.6%
XOI Oils1,114- 6.2%
Gold bull.1,680- 2.5%
GoldStcks187- 4.3%
Canada11462- 3.6%
London5164- 3.7%
Germany5492- 5.3%
France2856- 4.7%
Hong Kong17689- 4.3%
Japan8160- 2.6%
Australia4057- 4.4%
S. Korea1776- 3.4%
India15695- 4.1%
Indonesia3637- 3.1%
Brazil54894- 3.2%
Mexico34573- 4.7%
China2493- 1.5%
PREVIOUS WEEK (November 18)
DJIA11796- 2.9%
S&P 5001215- 3.8%
NYSE7282- 3.9%
NASDAQ2572- 4.0%
NASD 1002253- 4.3%
Russ 2000719- 3.4%
DJTransprts4841- 2.7%
DJ Utilities442- 2.4%
XOI Oils1,188- 5.0%
Gold bull.1,723- 3.7%
GoldStcks196- 7.7%
Canada11892- 3.1%
London5362- 3.3%
Germany5800- 4.2%
France2997- 4.8%
Hong Kong18491- 3.4%
Japan8374- 1.6%
Australia4246- 2.6%
S. Korea1839- 1.3%
India16371- 4.8%
Indonesia3754- 0.6%
Brazil55731- 3.1%
Mexico36284- 3.4%
China2531- 2.6%
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Next week’s Economic Reports:

Next week will be a very light week for potential market-moving economic reports, almost none, but including Factory Orders, the ISM non-mfg Index, and Consumer Sentiment. To see the full schedule of the week’s reports click here, and look at the left side of the page it takes you to.

To read my weekend newspaper column ‘It’s Time To Dump U.S. Treasuries Again!’ Click here.

Subscribers to Street Smart Report: In addition to the charts and updates in the ‘premium content’ area of this blog this morning, the new issue of the newsletter and a hotline are in the subscribers’ area of the Street Smart Report website from Wednesday evening. And we’ll have an update of our regular ‘Global Markets’ report, and an update of our regular ‘Gold, Bonds, Dollar, Inflation’ report early next week.

I’ll be back with the next regular blog post on Tuesday morning at 9:25 a.m. Have a great weekend!

Non-subscribers: How are you doing so far in 2011? We can help, and at very reasonable cost! Market, sector, stock, gold, bond, and dollar buy and sell signals, short-sales, long-side and ‘inverse’ etf’s, mutual funds, two portfolios of recommended holdings (one modified buy and hold, and one market-timing). Street Smart Report Online provides an 8-page newsletter every 3 weeks, an in-depth 6 page interim update every Wednesday on our intermediate-term signals and recommended holdings, an in-depth 4-page ‘Gold, Bonds, Dollar’ update every 2 weeks, and special reports and hotline updates as needed. Highly regarded and in our 24th year. As a bonus for a one-year subscription you will also receive my latest book Beat the Market the Easy Way- Proven Seasonal Strategies That Double the Market’s Performance. Click here for subscription information.

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