Sunday, August 29th, is the fifth anniversary of Hurricane Katrina's landfall along the Gulf Coast and all of us vividly remember the horrific images of that day and the days and weeks after.
Five years later, the Gulf Coast has come a long way but most would agree there's still have a long way to go and many scars yet need to be healed.
In the world of money and investing, the Financial Katrina hit three years ago this month with the beginning of the sub prime meltdown that led to the "Great Recession."
For the past year or so, we have been in what appeared to be a recovery but now looks more like the eye of the storm; today it is quite likely that the second wall of the hurricane is now rapidly bearing down upon us.
The news this week was intensely negative and the only bright spot came on Friday with Chairman Bernanke's speech at Jackson Hole in which he essentially told us, "don't worry, be happy" and that all would be well.
In spite of the Chairman's calming tone, Wall Street Sector Selector remains in the "red flag flying" mode and we believe that an intense storm lies just ahead.
Looking at My Screens
On a technical basis, one can only be bearish and the two charts below tell a quick and scary story.
chart courtesy of StockCharts.com
In the chart of the S&P 500 above we see the "death cross" highlighted by the downward pointing arrow wherein the 50 Day Moving Average crossed below the 200 Day Moving Average which is a widely followed indicator of lower stock prices ahead.
In the upper box we see the 14 day RSI pointing upwards from relatively oversold levels indicating that a short term bounce could be forthcoming, while the red horizontal line shows the support at 1040 which was tested and held every day last week.
From this display we can conclude that we are in a bear market, slightly oversold and near support that, if broken, could lead to a quick drop to the July lows of 1010.
chart courtesy of StockCharts.com
The point and figure chart above paints an even more ominous picture.
A double bottom "sell" signal was generated on August 11th and the index has now broken through the blue bullish support line, indicating the onset of a new bear market in this major index.
Support and resistance lines in point and figure charting tend to act like firm walls and mark major turning points in direction, and this recent trend change is the first since March, 2009, when the lows were hit and last year's unprecedented rally began.
The breach of this bullish support line is a major development and in my opinion is an unmistakable sign that it's time to head for the storm shelters.
The View from 35,000 Feet
The fundamental news was equally shocking this week as existing home sales declined to 3.8 million units for July from a previous level of 5.26 million. This number is a record low and single family home sales were at the lowest levels since 1995. Truly we are in what could only be described as a housing market depression, and this comes in spite of historically low mortgage rates that people appear to be ignoring. Seemingly almost nobody wants to buy a house at any rate or any price.
New home sales fared no better, declining to record lows, as well, while 25% of mortgage holders are currently "upside down" in their homes, owning more than they're worth, and 15% are in some part of the foreclosure process.
Beyond the dismal news from the housing market, the July Durable Goods report was dismal and points to an ongoing slowdown in capital spending and on Friday 2nd Quarter GDP was revised downward to 1.6% from a previous 2.4% in what could only be described as a terrifying result in light of the stimulus and Federal Reserve intervention required to generate this paltry number.
More and more analysts are pointing to further reductions in GDP for 3rd Quarter towards flat or even negative territory while the stock market seems currently priced for 1.5-2.5% growth and this creates a situation which is unlikely to have a positive outcome going forward.
Looking across the spectrum of noted analysts, we find Princeton economist and former Federal Reserve member Alan Blinder writing an article in the Wall Street Journal titled, "The Fed is Running out of Ammo" and noted Yale economist Robert Shiller appeared on the Wall Street Journal's "Big Interview" and said that a double dip "may be imminent." And finally Albert Edwards, the noted analyst from Societe General says to look for 450 on the S&P 500, a roll back to 1982 levels.
Fidelity reports that in the second quarter 25% of people took hardship withdrawals from their 401ks, a number that represents a 10 year high, to help them meet living expenses and the ECRI remained in recessionary territory with a -9.9% reading last week.
On Friday Intel cut their earnings and revenue forecast and across the Atlantic Ireland was downgraded and given a negative outlook by S&P. Also in Europe, interest rates and Credit Default Swap pricing continued to rise as their sovereign debt situation continues to erode confidence in the outcome of the European Central Bank's historic intervention efforts of a couple of months ago.
The bond market remains priced for Armageddon, forming what many say will one day be the biggest bubble of all time and lead to a historic crash in the bond market somewhere down the road.
But on Friday, Dr. Bernanke cheered world markets when he told us that he expected no double dip, that growth would continue and improve and that he and his colleagues stood ready to do whatever it takes to avoid deflation and that he had the tools to lead the global economy to recovery.
This upbeat assessment comes after unprecedented government stimulus, interest rates lowered to near zero and $1.7 Trillion of asset purchases by the Fed since the onset of the Great Recession.
So one can only wonder how this is going to work. If the medicine hasn't worked so far, why would a little more of the same medicine make a difference?
What It All Means
As we've been saying for weeks, a double dip looks highly probable with the odds growing daily, lower stock prices look likely and to make your chest feel even tighter, summer is almost over, traders will be back from the Hamptons, the kids will be back in school and we're about to enter the dreaded month of September which is historically the worst month for stock market performance.
At Wall Street Sector Selector, we remain in the "Red Flag" mode, expecting lower prices ahead, and we forecast that the second storm wall of the Financial Katrina is about to hit.
The Week Ahead
To say that a major week lies ahead is a massive understatement.
Economic Reports:
A busy round of economic reports next week will give us a look at personal income and spending, home prices, manufacturing and what the Federal Reserve really thought at their recent meeting with everything leading up to the climactic Non Farm Payroll report on Friday.
Certainly all of this will be food for thought going into the long Labor Day weekend.
Monday:
0830: July Personal Income, July Personal Spending, July PCE Core Prices
Tuesday:
0900: Case/Shiller 20 City Home Price Index
0945: August Chicago PMI
1000: August Consumer Confidence.
1400: FOMC Meeting Minutes
Wednesday:
0815: July Construction Spending
1000: August ISM Index
1400: August Auto Sales
Thursday:
0830: Initial Unemployment Claims, Continuing Unemployment Claims
1000: July Factory Orders
1000: July Pending Home Sales
Friday:
0830: August Non Farm Payrolls
0830: August Unemployment Rate
1000: ISM Services
Sector Spotlight:
Leaders: Silver, Oil, Copper
Laggards: Mexico, Global Shipping, South Korea
This week we're heading for Southwest Florida for a last week of R&R before school starts and reality strikes after the long Labor Day weekend. We hope to have a nice time on the beach and not see any tar balls between our toes.
Sadly, I'm sure this year's Labor Day celebration won't be a particularly happy occasion for the 14.6 million of our fellow citizens who remain unemployed and I can only wish them the very best and a speedy return to gainful employment and happier days ahead.
Wishing you a great weekend wherever you may be,
