Yesterday’s pullback came was blamed on concerns the Fed might taper its asset purchase program as early as this month following some better-than-expected initial claims and Q3 GDP data. The headline print for each certainly aided such thinking. Initial claims for the week ending November 30 checked in at just 298,000 (Briefing.com consensus 330,000) while the second estimate for Q3 GDP jumped to 3.6% (Briefing.com consensus 3.0%) from 2.8%.

The headlines had an undeniably encouraging feel to them. That was the first sub-300,000 print for initial claims since early September and the 3.6% growth in Q3 GDP was the strongest since the second quarter of 2010. Upon closer review, though, the headlines were a little misleading.

The Department of Labor acknowledged that seasonal adjustment problems biased the claims number lower (which means we are likely to see a higher print in subsequent weeks) while the change in private inventories accounted for 1.68 percentage points of Q3 GDP growth. Take the change in inventories out of the equation and real final sales were up just 1.9% versus 2.0% in the first estimate. Furthermore, the 1.4% growth rate in personal consumption expenditures was the lowest rate since the fourth quarter of 2009.

A big jump in inventories and a deceleration in personal spending isn’t exactly a combination befitting a robust growth picture. In that context, the tapering trade in our estimation probably had more to do today with the angst surrounding the November employment report on Friday than it did with a true read of today’s data.

Following the strong ADP Employment Change report on Wednesday, there is a presumption that the nonfarm payrolls number on Friday will also produce a positive surprise. The Briefing.com consensus estimate for nonfarm payrolls is set at 188,000 and at 200,000 for nonfarm private payrolls.

Given the four-day losing streak for the S&P 500, one shouldn’t be surprised if individual investors were a little less bullish this week. After last week’s surge in bullish sentiment, that is exactly what we saw. According to the weekly survey from the American Association of Individual Investors (AAII), bullish sentiment declined from 47.3% down to 42.64%. Perhaps the most surprising aspect of individual investor sentiment over the last few weeks is the fact that even after an eight week winning streak for the S&P 500, AAII’s measurement of bullish sentiment never increased above 50%.

While investors turned a little less bullish this week, they didn’t shift into the bearish camp. As shown in the lower chart, bearish sentiment fell this week as well. After coming in at a level of 28.25% last week, bearish sentiment declined to 27.55% this week. Neutral sentiment, on the other hand, saw an increase of 5.4 percentage points to 29.81%.

Friday’s action is sure to be dictated by the details of the November employment report and the direction long-term interest rates take in its wake.

IN THE NEWS: 
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From Yale Hirsch: 
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Writing a book is an adventure. To begin with it is a toy, an amusement; then it is a mistress, and then a master, and then a tyrant.” 
-Winston Churchill (British statesman, 1874-1965) 
My book,”The Trader’s Book of Volume” (published by McGraw-Hill) is now available both in English and now CHINESE!

Here is the link to Traders Press:

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VRTrader.com
P.O. Box 12665
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Phone: 928-282-1275
Fax: 623-243-4174

For anyone who still thinks that something other than the U.S. Federal Reserve’s experiment with Quantitative Easing is helping to lift U.S. stocks, the chart above should quickly dispel that.

Since the introduction of QE1 back in later 2008, the growth of the Fed’s balance sheet as a result of QE almost perfectly overlays a chart of the S&P 500.

And, we know that earnings are not driving stocks. U.S. non-financial company earnings have been almost flat for the last two years now. (The largest financial companies have received massive government subsidies, which explains most of their earnings)

Now that U.S. stocks are breaking their recent trend, it will be interesting to see the extent of this correction. If there is enough of a selloff, the graph above will start to exhibit a deviation between the amount of QE and stock prices. That might be an indictment of the lack of effectiveness of QE in putting the U.S. economy back on a long-term growth trajectory and in fixing U.S. unemployment. If the market does lose faith in QE, what will be the Fed’s Plan B?

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. 

Richardson GMP Limited, Member Canadian Investor Protection Fund.

Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

It’s hard to be bearish in December. 

This is the time of good cheer, dancing sugar plums, and brandy-spiked eggnog. It’s also the time of rising stock markets. 

More so than any other month of the year, December has a bullish bias. Going back to 1950, stocks showed gains in December 47 out of 63 years. That’s 74% of the time. If we only go back to 1970, the bulls are 35 for 43 – an 81% win rate. 

So like I said, it’s tough to be bearish during this time of year. But it’s also tough to overlook this…

The daily chart of the S&P 500 below shows the index breaking down from a bearish rising-wedge pattern. 

Previous breakdowns in May and August led to modest 6% and 4.4% pullbacks, respectively, over the following month. Something similar this time around would set a target for the index somewhere between 1,740 and 1,700. 

Yesterday, the S&P 500 tested its first red support line at about 1,780. After falling for four straight days, stocks are oversold enough that they could bounce from this level over the short term. 

However, any bounce that fails to rally the S&P 500 to a new all-time high above 1,813 will form a “lower high” on the chart. That’s a reversal pattern, and it increases the chances the next decline will take out support at 1,780 and spark a move toward one of the lower support lines. 

So go ahead and be cheery. Be merry and full of goodwill. And be bullish if you like. But be careful, too. Given the look of this chart, stocks have more downside. 

Best regards and good trading, 

Jeff Clark

Further Reading: 

Earlier this week, Jeff revealed another reason for caution: One specific thing happened within months of every single market peak of the last 41 years. And it might be happening again right now. Get all the details here. 

One of the stock market’s most reliable indicators is also pointing to a reversal. “We now have a broad stock market sell signal,” Jeff writes. “And the first sign that at least a short-term top may be in place.” See the chart right here.