Stocks stall as economy hits soft patch

The 3-day relief rebound hits a wall as the S&P 500 bonks its head on the 50-day moving average.

By Anthony Mirhaydari Mar 22, 2011 3:24PM

After last week's dramatic sell-off -- with the S&P 500 losing 3.6%, culminating with a washout on Wednesday -- the bulls have managed to string together a nice relief rebound rally. Monday marked the third straight up day. So that's it, right? With Japan's nuclear disaster coming under control and Libya's airspace filled with Western fighter jets, are stocks ready for another big uptrend?

 

Not quite. There are issues with the recent rebound. It came on light volume and disappointing breadth -- a sign that investors still aren't excited about stocks at these levels. And on all three days most of the gains came in the opening minutes of trading. The lack of intra-day follow through points to a lack of enthusiasm. Most importantly, key sector groups that have led the decline -- technology and semiconductors -- continue to lag badly.

 

Various technical and momentum indicators suggest this was a temporary reprieve within a medium-term downtrend -- a downtrend that's being powered by indications economic growth is set to slow.

 

 

To be sure, investors are selling heavily. According to UBS, its client flow data shows that U.S. clients were net sellers of both domestic and foreign equities for a fifth straight four-week average period. The heaviest selling is being seen in financial and technology stocks.

 

Soft patch ahead?
 
UBS economist Andrew Cates is worried. He finds that "evidence has accumulated in recent weeks to suggest that global growth may disappoint in the period ahead" at a time when growth expectations are very high. Economic forecasts, keyed off of leading economic indicators which are now at levels "that are not typically sustained" in Cates' words, will have to be revised downward.

 

 

You can see this in the chart above, which shows just how extended the UBS Global Growth Surprise Index is as recent data has beaten analyst expectations. This is not unlike the situation seen last April just ahead of the multi-month market swoon as unrealistic expectations were dialed back.
 
The factors supporting a softer patch of growth includes fading industrial production as overstocked inventories adjust, slower momentum from China, higher oil and commodity prices, and tighter global monetary policy.
 

Of all the factors, I believe inventories will be the most important in the months to come since industrial production has been a rare bright spot given still moribund consumer spending and job market gains.

 

Levels of inventories for both corporations and countries (reflected through purchasing managers’ indices) have increased at robust rates since 2009. Inventory levels are a good leading indicator of overall economic activity, as they signify the aggregate amount of confidence in future market activity for firms and nations. Now, global inventories have swelled to extremely high levels.

 

However, given the focus on political revolutions happening in the Middle East and the rise in energy prices, along with the sudden halt in production by industry leaders such as Sony and Toyota, experts expect inventory levels to decrease, causing a pause in growth as factory activity slows.

 

Until the clouds of uncertainty lift, stocks will continue to face selling pressure. I've recommended my newsletter subscribers focus on key short ETF positions including the UltraShort Semiconductor (SSG) and long defensive bond holdings including the iShares Investment Grade Bond (LQD).

 

Disclosure: Anthony has recommend SSG and LQD to his newsletter subscribers. 

 

Be sure to check out Anthony's new investment advisory service, The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up.

 

The author can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. Feel free to comment below.


 

2Comments
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Mr. Mirhaydiri gives very good information and he is one of the few authors of whom I read every word.

There was a good spike in manufacturing this past year but now there is so much turmoil in the world, we will see a backing off of this trend.  My 401K has been in cash for a week now and will go back into stock funds sometime in April or May depending on the world's situation.   My self direct IRA is in stocks with good dividend payouts.  There are still problems in Europe that have to be sorted out.   Japan will take forever to get back up and running at full speed.  

America still has more debt than it can handle and now we will be going into more countries in the Middle East with our inexperienced President not being fully involved in the crises we have in this country and abroad.   It seems he tells every country in the world how good they are and how bad the US is.

We don't have good feelings about the markets as we have no cheer leader out on the field bringing up our spirits.

These are cautious times for the Market and for America.  Good article.

Mar 23, 2011 7:56AM
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Hoiw much longer are we going to have to listen to this idiot before MSN yanks him? 
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