Real Life Cliffs

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The Economy May Have Already Fallen Over The Cliff

We think, that as usual, we are early in noticing these things. So, it could take a while for the statistics and the mainstream economists and media to catch on. But, to us, based on what we've seen over the last two to three weeks, a significant and profound slowing in the economy is taking place. And when upscale casual dining restaurants like the Cheesecake Factory and the Grand Lux Cafe' are showing signs of slowing, the problem is starting to affect even the higher income brackets.

This kind of slowing, though, is starting to be documented, although it is not being widely reported yet. According to Bloomberg: "The Thomson Reuters/University of Michigan preliminary consumer sentiment index decreased to 74.5 this month from 82.7 in November." This number jibes quite well with what we saw at Disneyworld during Thanksgiving week, which we chronicled in this article, titled "Joe Six Pack Is Gone."

The major point of that analysis was that while there were crowds at Disneyworld, they were smaller. The attendance was patchy in some parks, some of the time. And there were no working class people that we noted as we have on other trips. That particular observation ties in well with what our patients told us last week, what the Michigan numbers are saying, and what the inside numbers in the employment report are saying. The economy, in our opinion, is starting to slide once again.

For example, Thursday's charts show that the Bollinger Bands are starting to expand. But they are expanding above and below prices. All we know is that a big move may have started. Thursday was an up day. But Friday may change everything.

The Markets: Technical Divergence?

indu 7 dec 2012
Chart Courtesy of StockCharts.com

The Dow Jones Industrial Average (INDU) had a nice move on Friday, crossing above its 50-day moving average. The index is also acting as if it's gathering steam. And while that's a good thing for the Dow, the rest of the market, isn't quite as happy right now. That is worrisome.

compq 7 dec 2012
Chart Courtesy of StockCharts.com

The Nasdaq Composite (COMPQ) did not match the Dow's action on Friday. And neither did the Nasdaq Advance Decline line (NAAD). That is a worrisome development. The Dow is thirty big stocks. The Nasdaq Composite has thousands of stocks. When thirty stocks are rising and the majority of the market is falling, as the Nasdaq Advance Decline line points out, that's called a negative divergence. That means that too much money is flowing into too few stocks and that eventually the rally will fail.

naad 7 dec 2012
Chart Courtesy of StockCharts.com

Another worrisome sign is the very weak up slope in the Nasdaq Hi-Lo line (NAHL). This signals that even the few stocks that are rising are doing so in a weak way.

Much of this may change in the next few days or weeks. If there is a resolution to the fiscal cliff that the market buys into, we could see all of this be removed from the worry list. But right now, it's not looking very good.

nahl 7 dec 2012
Chart Courtesy of StockCharts.com

Conclusion

We don't like to see the Dow Jones Industrial average getting all the money while the rest of the market slowly fades. That's worrisome. It's more worrisome when you start seeing signs of a slowing economy, especially signs that consumer sentiment is starting to fold.

We remain worried and patient. We will wait and to see what happens. Making big guesses and taking chances are not the way to play this market.

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