The Debate Accelerates: Policy vs Deflating Economic Growth

The S&P 500 pierced through the bottom trendline of channel support Tuesday as fear builds of an economic slowdown globally. The past containment of the bottom trendline has represented the increased buying momentum for S&P stocks since June 4th. Tuesday's market action could have tipped investors to a reversal point in the S&P as traders grow more anxious about the multitude of grim growth news. Volume was above the 20 day moving average, now for the 3rd straight day in a row, adding to the bear case that the underlying up trend might be decelerating. New 52 week lows (red numbers) have been building as the S&P powers higher. RSI is below 50 and suggests near term prices could move lower. RSI has also produce what technicians call a “failure swing.” A failure swing occurs when the oscillator exceeds a previous top, corrects, and then heads for the old top, but fails to exceed it (purple arrows). Typically this type of oscillator behavior heeds warning of a trend reversal soon.

The Russell 2000 shows more technical damage than its bigger brother, the S&P 500. RUT shows a gap down below channel support AND closing below its 200 day moving average (red line). Technical indicators in RSI and Stochastic are showing signs of even more stress in the index. Since April 2nd, the Russell 2K has been registering lower highs (blue arrows) suggesting investors are willing to sell at lower and lower prices due to poor economic news. A “dead cat bounce” rally is likely to test the breakdown zone of channel support near $788.

BRIC nations are dangerously close to breaking major support levels. One dollar separates these etfs from major breakdowns. These 3 etfs are below ALL their major moving averages and have gapped lower 2 days ago.

The dollar has broken out to the upside and is currently in re-test mode. Strong buyside volume has been registered in this etf recently and confirms the breakout. However, that if the Fed announces another round of QE3 soon, traders should pay attention to what kind of easing the Fed proposes. If it is of the vanilla type, 1) extending the purchases of mortgage backed and treasury securities or a fiscal (tax) policy change (both have little effect on the US dollar) or 2) new commitments of capital, dubbed “a novel measure,” like slashing interest rates to 0% beyond 2014 or opening the discount window to banks offering direct, cheap credit to new businesses and consumer loans (will have a bigger effect on the US dollar). Until the Fed meeting is over, we are in a holding pattern with UUP. It is my opinion that the US Dollar is viewed as the global safe haven right now and will power higher soon.

The Dow Theory is in danger of triggering a new Dow Theory “sell signal.” The Transports have put in a new low, while the Industrials have not. IF the Industrials close below 12,492, a sell signal will trigger and will certainly be near term bearish for the equity markets. Both of these indices are riddled with economically sensitive stocks. When they go down, they drag the indices with it. All hands on deck! FINAL THOUGHTS: As earnings reports pour in with bottom line beats and top line misses, the stock market continues to wobble. Daily, we see reports from U.S. companies that the economy is indeed showing signs of a global slowdown. Yields on U.S. fixed income products continue to press lower. Additionally, speculative rumors of more QE3 runs rampant across the floor of the exchanges and news wires. All these “variables” are affecting stock prices and creating pockets of mis-priced assets. Investors are attracted to negative commentary during difficult and skittish markets. If the Fed moves forward now with QE3 , the economy has time to improve by the time the voters hit the ballot box for elections. Equity markets will go up and re-test the 2011 annual highs. This type of action will only stop the bleeding, but not heal the wound. If the Fed blinks and offers no additional stimulus at its current meeting next week, there is little doubt that the markets will breakdown and re-tests their 2011 annual lows, and possibly lower if Spain, France, or Italy self destruct. The debate rages; policy vs. deteriorating growth. Sentiment remains confused and lacks conviction. These are recipes for a range bound market. Sometimes traders have the mentality of sell now and ask questions later so pay extra careful attention to your support levels. They are: DOW 12,500; S&P 1325-1335, Russell 2K 775 (already broken to the downside). **Analyst Certification: The analyst principally responsible for the preparation of this research and presentation certifies that the views expressed in this presentation accurately reflect the personal views of the (author) and the subject security(s). The authors compensation is not or will not be directly or indirectly related to these specific recommendations or views contained in this presentation. The research analyst responsible for preparing this presentation has not received compensation from any of the subject company's listed or mentioned in this presentation. All opinions expressed in this presentation are subject to change without notice and you should always obtain current information and perform appropriate due diligence before making any investment decision. Mike Dalman, CMT Chief Technical Market Analyst Mike Dalman Investment Research