Market reaction to better-than-expected GDP report (3.5% vs 3.3% consensus) is the expected retest of yesterday’s break of key trendlines. A common technical pattern is to close a gap down; today the S&P e-mini at 1159 (at the time of this posting) is getting close to covering a gap at 1161. The Naz has a bit more to rebound to close its equivalent gap at 2116, so watch for continued strength today. It was bit surprising that markets were down yesterday before the GDP report, as more typical behavior is to rally into the news and fade it after. It shows the strength of the four-day down-move
We remain with clear signals of bifurcation yesterday in all but the Dow, which confirms the trend change: Dollar up, everything else down:
- Dollar Index broke above both the wave 5 ‘wedge’ trendline and the trendline for the whole wave down. While the STU wants to see it break the DX77.50 level (the wave I of 5 level), the break of the trendlines is sufficient for a bifurcation to confirm a change of trend. The DX should now shoot up above 90. The sharp movement off the low has been steeper than the fall, and has broken as a five-wave impulse.
- The S&P has also broken the 0-B trendline from Mar9 (through the Jul8 B or X wave low) indicating it has confirmed a trend change to down.
- The Naz has had an even steeper fall below its trendlines and seems poised to lead the charge down at a faster clip. Downside volume (9:1) suggests a relatively deep drop to come, albeit with sharp reversals along the way.
The strongish GDP report was based on gimmicks: Cash4Clunkers and the first-time buyer’s credit. Edmund’s noted that the C4C payments of $4k per car are really much higher at $24K per car when the trendline for sales without C4C is compared with the incremental sales from it. (They also note today that there are clear signs of a recovery in car sales from the October data.) A similar analysis of the $8K housing credit would estimate a $43K actual cost for incremental sales. Whatever the validity of those methods, they raise the question of whether this GDP bump will sustain. We should see estimates for Q4 be adjusted upwards as economists tends to extrapolate the present, probably from a pre-report range of 2.5% to a past report range of 4%.
In past history the GDP turnaround following a bad patch – and we have been in the worst patch since the 1930s – would be much more robust. We grew well over 10% a year in 1934-36 coming out of the first phase of the Great Depression: 17%, 11% and 14%. Today’s annualized GDP reading at 3.5 and a Q4 performance at 4% are quite disappointing in comparison.
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The biggest question is who will buy the 2.38 Trillion worth of treasuries in the next 11 months. That is nearly 200 Billion a month. With these type of numbers will the FED be able to raise interest rates and make the situation even worse. I mean the uptick in interest rates by only 2% will increase the interest payment by more then 40 billion. That is all the Medicare cuts that have been proposed for the next 10 years. Can you image what will happen if they will have to raise it to 10% or 20% to stop inflation. It really seems the US economy is in a no win situation.