Saved by the revision

After the first estimate of the Q1 GDP I posted this chart, noting that the series has made a first downtick and that a second one would signal a recession.

Below I updated the chart after today's release. The downtick is gone!

The headline number for the just released revision may be weak but there are some improvements under the hood.

Update

The market has been bouncing lately off strong monthly SPX cash support at 1292.

However, it rarely makes a lasting turn at an important level without at least a minor break. The ES monthly chart for the June contract suggests the market may reach 1270 before a turn.

Also, there is important data coming in on Friday: ISM Manufacturing PMI and Nonfarm Payrolls.

As I mentioned in the past, the economy is slowing down (at least over the short term), so I expect the data to be weaker than expected.

The PMI may have put in a lower high last month ...

... and the private payrolls number is decelerating already.

Analogy

I highlighted in the chart below action from 2007 after long multiday drops and a rise similar to yesterday.  We could see a retest of the lows in the following days, followed by more upside.

The bear is back

Two of the indicators I am watching have reached levels specific only to bear markets.

Here they are:

> a ratio of the monthly cumulative advancing versus declining volume.

> the 5 day ema of the total put/call ratio (this is not as reliable as the first one but the fact that it comes after important divergence with the bull gives it legitimacy).

This is the third time since 2010 this happens, which says enough about the unprecedented volatility of the market. I remember George Soros writing in The Alchemy of Finance that abnormal volatility usually portends an important turn, so what has been happening until now is not a good sign.


What to do about it?

Change the strategy of buying intermediate term corrections to selling intermediate term bounces (a first bounce can reach even the highs at 1420). Also, go long for the short term as the market becomes oversold.

Meanwhile, watch for signs of strength that would indicate a possible come back of the bull as it happened in the autumn of 2010 and of 2011.

The middle of the correction

The market has gotten oversold after the 6% drop from the top. Here is an indicator that reaches the lower horizontal line at intermediate term bottoms.

This is an average between two longer term rate of change measures. When reaching the oversold line after a correction a new bull move up usually follows.

However, the indicator can dip below the oversold line before another bull leg starts. It did so during the January 2010 intermediate term correction just before a 2 day rally that only represented a bounce.

Now, the market looks the same and I think a bounce will again only be temporary.

Here is Jan-Feb 2010:

and here is May 2012:

A bounce from here would take place, as is usually the case, after a clear break of an important level. here is a monthly chart of the June contract.

Looking toppy

I am not going to get bearish here, this is still a bull by many measures, but a long term view of the 5 day ema of the put/call ratio is looking toppy.

5 day ema of the put/call ratio from 2005 to today

    click to enlarge

At support and oversold

Here is a weekly chart of the June ES contract. The market has reached important support.

Meanwhile, the total put/call ratio is oversold.

Thus, a short term (a few days) bounce is in the cards after which I think the correction will resume.

Oversold but awful breadth

Here is an indicator I watch over the long term: a ratio of the monthly cumulative advancing versus declining volume.

This indicator does not go too far below the 0.8 level during bull markets so, whenever it does, it means a bear market has started.

Since August 2007 it has given such a signal three times (purple rectangles). The first one was great, the other two fakes.

Currently, the ratio is again at the level that should not be crossed during bull markets (green horizontal line). It has reached it as the market only corrected 4.50%, which is very fast compared to its behavior since March 2009 - hence, the headline of this post.

Usually a normal bull market correction would end with this indicator oversold but if this correction is not over yet the indicator has every chance to signal again a bear market.

Will it be a fake once more or will the third time during this bull be a charm?

Key word: "slowdown"

click on charts to enlarge


The three pillars of the global economy:


... USA: slowdown expected

... Europe: already slowed down, now contracting

... China: may very well slowdown