Tales From The Road: Negative Technicals But Fairly Positive Personal Observations

Are The Markets Totally Disconnected From The Economy?

Financial markets are now fighting a battle between downward momentum and a clearly oversold condition in the stock market.

On May 14, in this space, we wrote a piece titled "Are We Living Through The Death Of The Stock Market?" Since then the S & P 500 (SPX) fell 4.14% in five consecutive losing seasons. In fact the S & P 500 has fallen for eleven out of the last 13 sessions, and has lost 8.5% since its intraday top of 1415.32 on May 1, 2012.

So the real question for investors is whether we are in the early stages of a bear market or if this is that "normal" 10% correction that periodically hits all bull markets.

Anyone who trades knows that it's impossible to know that answer at this point in time. What we know is that things look dangerous, and they feel fairly bad. We know that being long this market, as of last Friday was not a good idea. And we know that the fundamental situation, especially with regard to Europe, and the U.S. election are, to say the least, of great concern.

Yet, if you look around, things are mixed. Some businesses are doing o.k. Others are actually thriving. And many are in deep trouble. It's going on everywhere. And the trend remains the same, variable. In other words, these are difficult times to analyze, and in which to make very large bets, one way or another.

What we do know is that the charts are very much skewed to the down side while at the same time telling us that this is a market that is well overdue for some kind of bounce.

Chart Courtesy of StockCharts.com

The S & P 500 (SPX) fell through its own 200-day line fairly convincingly on Thursday, and further below the key line on Friday. The index now has support inside the 1287-1300 band, where it closed on Friday. A convincing break below this band, without a quick snapback could lead to more selling.

The small stocks in the Russell 2000 Index (RUT) also now in a well established down trend. This, to us, is of more concern. Small stocks are where growth investors tend to make longer term bets and where momentum traders push stock prices higher. A break here suggests that many are seeing little chance of robust growth. Over the long term, this is of major concern, unless it is corrected.

Chart Courtesy of StockCharts.com

The internal indicators of the market itself, are not providing much solace either. The Nasdaq Advance Decline line (NAAD) is making new lows on a regular basis now. This indicator topped out in late April, about a week before the S & P 500 topped out on May 1 and has been making lower lows and lower highs since. We like using the Nasdaq A-D line because it's not distorted by the large number of ETFs, preferred stocks, and bond funds that trade on the NYSE. The NYSE A-D line has also faltered, though, making the market's breadth very negative at this point.

Chart Courtesy of StockCharts.com

The action in the Nasdaq Hi-Lo line (NAHL) is increasingly negative. This indicator stayed positive longer than the Nasdaq A-D line, suggesting that up side momentum was still somewhat viable. That is now in question to a major degree as this line is on the verge of a major breakdown.

Chart Courtesy of StockCharts.com

Tales From The Road: Texas Remains Buoyant

We drove to Houston on Friday, not knowing what to expect. What we got was a surprise. The economy across the I-45 spectrum seems to be booming as travel is as busy as ever.

Truck traffic was not as busy as we've seen before. And there were, not surprisingly, a lot fewer China Freigth trucks than we've seen on other trips. But automobile traffic was nearly bumper to bumper as we've seen on I-35 on the road to Austin.

One interesting observation was that the number of older cars on the road seemed to be dominant. There were the usual SUVs, but there were lots of smaller cars. The number of BMW, Mercedes Benz and other luxury cars was also smaller. Gasoline prices seemed to be in the $3.59 per gallon range.

There is a filling station near Huntsville that goes by the name of Bucee's. The place has a convenience store that's about as big as a mid-size super-market, and has enough gas pumps for a fleet of cars. There were lines at all the gas pumps. Inside, the place was literally shoulder to shoulder. The deli was busy with travelers buying road food. And the number of employees, at a quick glance, had to be at least 100 people.

The cash registers had lines. And the food was extremely fresh due to the traffic. Accross the highway, other gas stations and restaurants were also busy.

Houston, along with Dallas, are flying high on Federal highway money too. Highway construction is rampant. Houston closed loop 610 at a busy intersection over the weekend, making life difficult for motorists.

Our hotel was full. Aside from a large wedding, there were plenty of families and business travelers, both domestic and international. Traffic on the streets near the Galleria, and other places around town was busy. Other areas were not as busy.

We had to stand in line at one CVS as people were using it as a convenience store, buying small groceries and snacks.

All in all, the Texas economy remains better than others, at least in larger metropolitan areas. Our experience in Houston is similar to what we saw in Austin a couple of months ago, and what we see to a slightly lesser degree in Dallas on a daily basis.

When placed into the overall economic picture, we still see a regional variation to the U.S. economy with Texas remaining a bright spot.

Conclusion

We have looked at two very different perspectives in this column. One is the extremely concerning state of the stock market, which is now nearing that 10% correction point in the S & P 500. At the same time, we have described our observations of the Texas economy, based on our own anecdotal observations.

We see a market on the verge of a major breakdown. And we see the state of Texas doing fairly well, at least in the pockets of activity that have to do with large cities. We have had similar observations about Austin and Dallas in the past few months. The reader can visit our "Tales of the Road" for reference.

What's our conclusion? Texas is in better shape than the overall U.S. economy but the stock market is close to deciding whether it will go into a full fledged longer correction or whether the nearly 10% pullback of the last two weeks is enough.

We think that there may be a connection between the two. And we think that it could still take a few more weeks before things become clear. In the meantime, caution is a marvelous thing to possess.