Trading for December, 31, 2007

5-Day Momentum Indicator, last 100 days. S&P = yellow.

IB =Intraday Behavior(pink). PM = Price Momentum(blue).

For Monday(12/31), the Up/Down Indicator is .70, suggesting
a positive bias for the Stock Market.

The S&P Interval = 8 points.

Unemployment Threshhold

If one economic indicator should have an impact on investor's
mind, is the coming Unemployment Report.


The chart above shows the year-on-year change in the 3-month
average of the Unemployment rate.

Notice that an increase of .2 percentage points is the threshold
from which a self sustaining increase in the Unemployment rate
tends to accelerate.

If Non-Farm Payroll increases less than 70,000 for the December
Report, then the Unemployment rate will increase to 4.8%. This
will result in a y/y .3% point increase.

Looking at it from a percentage stand point, the following facts
are apparent: a .3% y/y up-tick in the Unemployment rate is
equivalent to a 6% jump.

What has this meant in the past?

The following table provides the number of months INTO
RECESSION needed to approximate the current(6%)
level in the year-on-year percent change in the unemployment rate.

Start of Recession ___Numbers of Months into recession needed
________________to reach the current y/y chg in Unplymnt

Mar 2001 ........................... 1 month
Jul 1990 ............................. 2
Jul 1981 ............................. 4
Jan 1980 ............................ 2
Nov 1973 ........................... 6
Dec 1969 ............................ 1
Apr 1960 ............................ 3
Aug 1957 ............................ 2
Jul 1953 ............................. 4
Nov 1948 (from Jan).......... -1

Average .............................. 3 months

Well, for starters, with the exception of November of 1948, this
6% jump in Unemployment is the highest ever found at the start
of any recession since WW-II.

As a matter-of-fact, it has taken about 3 months into a typical
recession to find this kind of increase in the Unemployment
rate!

So, If history is any guide, we could very well be in the second
or third month of a recession already!


5-Day Momentum Indicator, last 100 days. S&P = yellow.

IB =Intraday Behavior(pink). PM = Price Momentum(blue).

For Friday(12/28), the Up/Down Indicator is .70, suggesting
a positive bias for the Stock Market.

The S&P Interval = 8.25 points.

Trading for December 27, 2007

5-Day Momentum Indicator, last 100 days. S&P = yellow.

IB =Intraday Behavior(pink). PM = Price Momentum(blue).

For Thursday (12/27), the Up/Down Indicator is .44, suggesting
a negative bias for the Stock Market.

The S&P Interval = 8.25 points.

I expect the market to end lower tomorrow.

Trading for December 26, 2007

5-Day Momentum Indicator, last 100 days. S&P = yellow.

IB =Intraday Behavior(pink). PM = Price Momentum(blue).

For, Wednesday (12/26), the Up/Down Indicator is .60, suggesting
a positive bias for the Stock Market.

The S&P Interval = 7.5 points. Use 12.5 with increased volatility.

Despite tomorrow's favorable bias, wait for weakness in the AM
to buy. Sell into strength.

Trading for December 24, 2007

5-Day Momentum Indicator, last 100 days. S&P = yellow.

IB =Intraday Behavior(pink). PM = Price Momentum(blue).

For, Monday (12/24), the Up/Down Indicator is .56, suggesting
a positive bias for the Stock Market.

The S&P Interval = 8 points.

Consumption: Propensity vs Ability

The Chart above is the ratio of (six-month average) Non-Durable
Consumption to Durable Goods Consumption (ND/DG).

Non-Durables are heavily influenced by essential items such as
food and energy. Discretionary consumption in big-ticket items
are associated more closely to Durable Goods Consumption.

Notice that the ratio has been rising for the last few years.

This means that essential items are absorbing more of the
Discretionary Income and less spending-power is left for
Durable Goods.

The Ratio is up 20% from its recent low. What has this meant
in the past?

The graph below can help.


This chart shows the percent change in the ND/DG Ratio from
its recent low.

It is not surprising that recessions are associated with a
rising number. Even in 2001(not a consumer-led recession) this
held true.

The following are the percent changes in the ND/DG Ratio
into Mid-Recession.

Mid-Recession ... Pcnt change.

Jan 1991 ......... 23%
Mar 1982 ........ 26%
Apl 1980 ......... 18%
Jul 1974 ......... 13%

So, the current number (20%) has in the past, corresponded with
bad economic times. I see no reason to believe that this
time will be different.

The Consumer has, incontrovertibly, a propensity to spend. But
does it have the wherewithal to disburse now?

Trading for December 21, 2007

5-Day Momentum Indicator, last 100 days. S&P = yellow.

IB =Intraday Behavior(pink). PM = Price Momentum(blue).

For, Friday (12/21, the Up/Down Indicator is .56, suggesting
a positive bias for the Stock Market.

The S&P Interval = 11 points.


The green line above represents resistance at the EL 1468.

For those who acted on the bullish signal given by the 5-Day
Momentum Indicator to buy weakness on Tuesday(day 8 on the
EL chart), tomorrow is a good day to take profits at S&P 1468.
This cooresponds to S&P Futures = 1478.5.

See here.

TRading for December 20, 2007

5-Day Momentum Indicator, last 100 days. S&P = yellow.

IB =Intraday Behavior(pink). PM = Price Momentum(blue).

For, the Up/Down Indicator is .44, suggesting
a negative bias for the Stock Market.

The S&P Interval = 7.25 points. Use 11 points with increased
volatility.

Trading for December, 19, 2007

5-Day Momentum Indicator, last 100 days. S&P = yellow.

IB =Intraday Behavior(pink). PM = Price Momentum(blue).

For Wednesday(12/19 ), the Up/Down Indicator is .51, suggesting
a slight positive bias for the Stock Market.

The S&P Interval = 7.25 points. Use 11 points with increase
volatility

Trading for December 18, 2007

5-Day Momentum Indicator, last 100 days. S&P = yellow.
IB =Intraday Behavior(pink). PM = Price Momentum(blue).

The 5-day Momentum indicator is pointing to a rebound.

Any weakness tomorrow can be bought. I expect the
Stock Market to close higher.

Keep in mind that this is a very short-term signal.

For Tuesday(12/18), the Up/Down Indicator is .63,
suggesting a positive bias for the Stock Market.

The S&P Interval = 7.25 points. Use 11 points with
increased volatility.

Inflation, the Fed & P/E Contraction.

The chart above is that of the PPI divided by CPI using a 3-month
average.

I have explained previously that as the PPI rises faster than the
CPI, a contraction in the overall Stock Market's P/E occurs.
Click here.

In summary:

The Earnings-Yield, relative to Bond Yields, rises.(One of
Greenspan's widely followed indicators.)

The Earnings-Yield(EY) is the reciprocal of the P/E.
Therefore, a rise in EY is the equivalent to a contraction in P/E.

The "Terrible Twos" indicator, shown in the July 22nd post,
has successfully pointed to problematic times.

Recall that I took the (annualized) difference between the
6-month CPI percent change vs. the 18-month percent change.
See here,

When this difference reaches two percentage points(hence,
the "Terrible Twos" reference) it poses a challenge for the Fed.

In 1979, Chairman Volcker, to beat inflation, hit the brakes on
monetary policy. Interest rates skyrocketed and the worst
recession since the depression followed, leading to over 10%
unemployment in 1982.

In 1987, Chairman Greenspan increased rates,precipitating the
largest Stock Market one-day crash.

In the summer of 2007, following two years of rates increases,
Chairman Bernanke was comfortable with the status quo.

Then the mortgage fiasco surfaced and Mr, Bernanke changed his
tune. To his credit, he did lower rates despite inflation's
kicking and screaming.

The dilemma has ended. Inflation is so conspicuous, that the
chairman's credibility is now in question. Consequently, easing
monetary policy can not be assumed anymore.


5-Day Momentum Indicator, last 100 days. S&P = yellow.
IB = Intraday Behavior(pink). PM = Price Momentum(blue).

For Monday(12/17), the Up/Down Indicator is .56, suggesting
a positive bias for the Stock Market.

The S&P Interval = 7 points.

Trading for December 14, 2007

5-Day Momentum Indicator, last 100 days. S&P = yellow.
IB =Intraday Behavior(pink). PM = Price Momentum(blue).

For Friday (12/14), the Up/Down Indicator is .63,
suggesting a positive bias for the Stock Market.

The S&P Interval = 7 points.
Today's action provides an easy study for the interval.

Real Retail Sales: Flat

The chart above shows the year-on-year percent change
(3-month average) of Retail Sales, CPI and Real Retail Sales.

For both, Retail Sales and CPI a 0.7% increase has been used
to estimate November's numbers.

Inflation in gasoline prices played a major role in the small
spike up for both series. Notice, however, that the "Real"
number remains flat.


5-Day Momentum Indicator. S&P = yellow.
IB = Intraday Behavior. PM = Price Momentum.

For Thursday (12/13), the Up/Down Indicator is .70,
suggesting a positive bias for the Stock Market.

The S&P Interval = 7 points.

CPI vs. Oil Imports

I have overlaid the CPI year-over-year percent change on the
chart of Oil Imports presented yesterday.

The good correlation between the two series is not surprising,
but it seems that Oil is having less of an impact on CPI lately.

Perhaps CPI has been muffled. My guess is that,there is less
oil-price influence but more importantly, CPI is understating
true inflation.

Regardless of the recent disparity with CPI, the liquidity issue
presented yesterday, remains a huge concern.


5-DAY Momentum Indicator. S&P = yellow.
IB = Intraday Behavior(pink). PM = Price Momentum(blue).

For Wednesday (12/12) the Up/Down Indicator is .57, suggesting
a positive bias for the Stock Market.

The S&P Interval is 11.5 points.

Has the FED provided ample Liquidity?

The chart above is of US Oil Imports expressed as percentage
of the M2 money supply.

Notice the recent spike and the one circa 1980.

Recall that the 1970s were years characterized by rising oil
prices, which culminated when Fed Chairman Paul Volcker
increased the Prime Rate to over 20%, breaking inflation's
and commodities) back by generating the worse recession since
WWII.


This chart illustrates what percentage of a two-years change in
M2 was needed to cover oil imports.

So recently, as in 1980, Oil Imports took the equivalent of nearly
40% of two years of change in the money supply.

The spike occurring in 1994-95 in this number was mostly due to a
slowdown in the growth of M2 to nearly zero.

The rise in the price of oil accompanied with an increased in
demand, has elevated Oil Imports to a point where Liquidity
is being syphoned from the economy at a dangerous rate.


5-Day Momentum. S&P = yellow.
IB = Intraday Behavior(pink). PM = Price Momentum(blue)

For Tuesday (12/11) the Up/Down Indicator = .45, suggesting
a negative bias for the Stock Market.

The S&P Interval = 9.5 points. Use 11.5 with increased volatility.

Employment: Trending Lower.

This chart shows the year-over-year percent change in
Employment.

The Household Survey(blue line) and Non-Farm Payroll(green)
continue to trend lower despite positive numbers in the
November report.


The chart above is that of the year-over-year percent change in
the two major sectors of Employment.

The Service Sector(pink) is about 84% of Total Employment.
The Goods-Producing(blue) is about 16% of Total Employment.

Both sectors are clearly deteriorating and are at, or lower
than, the levels preceding the last recession which started
in March, 2001.

As explained last week, the preponderance of jobs in Services
makes the economy vulnerable to any slowdown in this area.
See here.


5-Day Momentum. S&P = yellow.
IB = Intraday Behavior(pink). PM = Price Momentum(blue).

For Monday (12/10) the Up/Down Indicator = .34, suggesting
a negative bias for the Stock Market.

The S&P Interval = 9.5 points.

Trading for December 7, 2007

5-Day Momentum Indicator. S&P = yellow.
IB = Intraday Behavior(pink). PM = Price Momentum(blue).

For Friday (12/7) the Up/Down Indicator = .59, suggesting
a positive bias for the Stock Market.

The S&P interval = 9.1 points. Use 12 points with increased
volatility

Trading will be dominated by the Unemployment Report.
A high expectation has been built.

Trading for December 6, 2007

5-Day Momentum. Last 100 days. S&P = yellow.

IB = Intraday Behavior(pink). PM = Price Momentum(blue).

For Thursday (11/6), the Up/Down Indicator = .43, suggesting
a negative bias for the Stock Market.


The S&P Interval = 10.5 points.

Trading for December 5, 2007

5-Day Momentum, last 100 days. S&P = yellow.
IB = Intraday Behavior(pink). PM = Price Momentum(blue).

For Wednesday (12/5), the Up/Down Indicator is .67, suggesting
a positive bias for the market.

Tomorrow is a pivotal day to maintain the upward thrust that
started last week in the market.

I am leaning towards the notion that a continuation of the
move which started last week, will take place. Consequently
I expect the market to end higher on Wednesday.

Weakness tomorrow would neutralize this thrust.

The S&P Interval is 10.5 points. Use 14 points with increased
volatility.

Trading for December 4, 2007

IB = Intraday Behavior. PM = Price Momentum.

For Tuesday (12/4), the Up/Down Indicator = .49, suggesting
a slight negative bias.

The Interval = 10.5 S&P points.

The Service Economy Peril.

The chart above is that of the Consumption of Services expressed
as percentage of the Personal Consumption Expenditure.

Notice how the over all trend has been upward. This means that a
larger proportion of nominal spending has been going to services.


The chart above shows the percentage of jobs, from the total,
that are service-related. Note also how this percentage has
been trending up to commensurate with spending in services.


The green line illustrates the relative performance of the
Service Consumption price-index to the Non-Durable
Consumption price-index.

This relative performance has also been to the up-side as
shown by the black trend-line.

Inflation is a transfer of wealth. It is usually associated with
prosperity for the beneficiaries of the price increase. Saudi
Arabia does not complain of rising oil prices. Neither does
Chile, when copper costs more.

It is easy to conceive how employment increases more easily in
industries benefiting from price inflation. This factor explains
to a large degree, why the Service Sector of the economy has
enjoyed relative out-performance in job creation.

Notice, however, how the Service price-index is losing
ground with respect to the Non-Durable price-index(green line).

The obvious culprit is the increase in food and energy prices
that heavily influence the Non-Durable Consumption.
See here.

As more of the nominal spending is diverted away from the
Service Sector (to the Non-Durables), this trend in prices will
be re-enforced. Competition -brought about by many years of
attractive price environment- will deprive the Service Sector
from pricing-power, as increases in costs take place.

Then the sector providing the greatest employment will come
under pressure and job losses will follow.

The disproportion of jobs held in Services create an enormous risk
to our economy. The potential for deflation is real and being
sensed by bond markets around the world.


IB = Intraday Behavior. PM = Price Momentum.

For Monday (12/3), the Up/Down Indicator is .55, suggesting
a positive bias for the Stock Market.

Despite this bias, I think the market will end lower tomorrow.

The Interval = 10 S&P points. Use 15 with increased volatility.