A warning for the bulls

As NBER has declared the recession over and with the SPX decisively rallied through technical resistance at 1130, traders should be tilting towards the bullish side, right?

Not necessarily. Barry Ritholz posted on the 10 things that make him nervous about the market. I generally agree with Barry's assesssments and I would like to add a few more of my own. While I don't have ten items, here is what is bothering me about stocks at the current levels.


Technicals pointing to economic deterioration
Analyzing relative charts, sectors/industries relative to the market, can tell you a lot about what the consensus is thinking. Here is the relative chart of the Morgan Stanley Cyclicals Index:

The chart looks like an inverted saucer to me - which is bearish. The cyclicals deteriorated through a relative uptrend in May and are now in a relative downtrend. This is not the picture of a robust economic recovery.

What's more, when I look at housing, as proxied by XHB against the market, it isn't signalling a rip roaring recovery either.

As well, the Banking Index looks terrible against the market. This picture looks a lot like the relative chart of the cyclicals - a relative downtrend within an inverted saucer top formation. Without leadership from the Financials, can a new upleg be launched?

For the followers of my Inflation-Deflation Timer model, I refer to my latest comment indicating that I am getting very mixed signals. The model has moved to a technical "inflation" signal. I would tend to discount that signal and remain in "neutral" because of the anomolous condition of strong commodity prices and falling bond yields.


Watch out for the double-tip talk
John Hussman has been writing in the last several weeks about impending deterioration in economic indicators [emphasis added]:

As I've emphasized in recent weeks, the U.S. economy is still in a normal "lag window" between deterioration in leading measures of economic activity and (probable) deterioration in coincident measures. Though the lags are sometimes variable, as we saw in 1974 and 2008, normal lags would suggest an abrupt softening in the September ISM report (due in the beginning of October), with new claims for unemployment softening beginning somewhere around mid-October. It's possible that the historically tight relationships that we've reviewed iin recent weeks will not hold in this particular instance, but we have no reasonable basis to expect that. Indeed, if we look at the drivers of economic growth outside of the now fading impact of government stimulus spending, we continue to observe little intrinsic activity.

Already, the employment picture is ominous:

• IMF Managing Director Dominique Strauss-Kahn has warned about a jobless recovery.
• The New York Times reports that older Americans are worrying that they will be permanently locked out of employment. Even if that isn't true, these concerns will serve to put a lid on their spending.
• Polls show that unemployment is rising again.
• At a local level, Gregor Macdonald reports that California employment is falling again.

Should we depend on a Bernanke Put?
To be sure, the latest FOMC statement seem to indicate that the Fed stands ready to act with another round of quantitative easing should the economy show signs of further weakness - and that should put a floor on any stock market decline. In the interim, however, the bulls may have to suffer through a growth scare before the Fed rides to the rescue.