Some unpleasant news

Readers of this blog are aware that I am cautiously optimistic about the outlook of the stock market & the economy. My take is that the economy has seen the worst & we may see some growth in later part of the year or early part of next year. The stock market- being a barometer of the economy- should recover earlier and that's what we saw in the past 3-4 months. The current correction is taking place in an over-bought market and is deemed healthy.

However, there are signs that the recovery may be running into trouble. The market was taken by surprise in early July when the US' unemployment rate jumped to a 26-year high of 9.5 per cent, with another 467,000 people losing their jobs in June. Most economists now believe it will top 10 per cent before the end of the year. Some 14.7 million people are now looking for work in US.

Firstly, we shall look at the charts of crude oil prices (WTIC) & freight rates (BDI). Increased economic activities & trades will drive up BDI & WTIC. We can see that BDI started to recover in early January while WTIC recovered in early March. These were immediately followed by a recovery in DJIA in the middle of March. Now, the picture is getting cloudier- BDI has broken below its 20-day SMA & WTIC has just broken below its 50-day SMA. Are we seeing a mild slowdown or something worse?


Chart 1 : DJIA, WTIC & BDI- 18 months to July 2009 (Source: Stockcharts.com & Investment Tools)

The second thing that we must look out for is the movement of the 10-year Treasury yield (TNX). If the economy is about to pick up & is flushed with liquidity, the bond market will signal its concern about a potential rise in inflation rate by selling down Treasury bond which automatically pushed up the yield. However, bond traders will do the reverse once the economy recovery shows sign of weakening. We can see both actions in end 2002 & middle of 2003, where the TNX crossed above the 10-month SMA & then dropped below the same line (the yellow & red vertical lines). You will note that in May this year, TNX crossed above the 10-month SMA and went as high as 4%. It is now dropping back very sharply & would likely to test the 10-month SMA line at 3.0-3.1% soon. It has already broken below the strong horizontal support area of around 3.5%.


Chart 2: S&P500 & TNX- 10 years to July 2009 (Source: The Technical Take)

From this article, you may have a better understanding of the bearish factors affecting the markets today. I have appended below the links to a few articles that take a rather grim view of the current economic situation. They are:

1. 'The crisis is morphing again', by PIMCO's Mohamed El-Erian (from FT Alphaville)
2. 'The worst is yet to come', by IMF chief (from Malaysian Insider)
3. 'Expect new equity low in 2nd Half', by Societe Generale's Albert Edwards (from Zero Hedge)
4. 'We're Headed Right Back To The 1930s' by Paul Krugman (from Clusterstock)
5. Second Stimulus to be considered, from US presidential adviser Laura Tyson (from Bloomberg)