Based purely on the stock market, the economy should be rockin'
and rollin' but while the market's performance has been stellar,
the economy is flat.
Will stocks catch up with the economy or the economy with
Just how strong is the market? The SPDR S&P MidCap 400 ETF
(NYSEArca: MDY) is trading at an all-time high, the Nasdaq-100
(Nasdaq: QQQQ) has surpassed its 2007 watermark, the Russell 2000
(NYSEArca: IWM) is closing in on its all-time high, the S&P 500
(SNP: ^GSPC) has doubled since March 2009, and the Dow (DJI: ^DJI)
is viewed as the ultra safe haven in a world of turmoil.
How strong is the economy? Real estate (NYSEArca: IYR), the
biggest wealth builder/destroyer in the country is still weak. The
Standard & Poor's Case-Shiller Home Price Index has dropped to
the lowest level in nearly a decade. As the Home Price Index has
fallen below March 2009 levels, residential REIT stocks have nearly
tripled since then.
Another huge contributor to a healthy economy -
- shows signs of improvements at a peripheral glance but continues
to lag significantly if examined beyond the rosy headline numbers.
To wit, if it wasn't for the labor force sliding to a near 30-year
low, the headline unemployment number would be around 12% while the
real unemployment would be around 20%.
Based on a 11-line surface analysis, stocks and the economy are
out of sync. To see whether stocks will catch up with the economy
or vice versa, we'll need to slice beneath the service and examine
the very foundation of our economy.
Multi-decade Economic Trend
Unnoticed by Wall Street, the economy has been shifting gears,
and has gone from acceleration mode to coasting mode. How so?
A few decades ago, sweat-trenched U.S. manufacturing facilities
were the most fertile, growth-producing environment on the planet.
This growth was fueled by 'Made in America' products. The growth
was organic and it was real.
When taking a closer look at the economy over the past 70 years,
we see two distinct growth periods. Phase 1 lasted from 1947 - 1966
and phase 2 stretched from 1975 - 2000.
Throughout phase 1, GDP averaged 4.18% while unemployment was
low. GDP during phase 2 averaged 3.40% with unemployment inching
, a company that endured through both phases, provides important
clues about the difference between both phases. Up until the end of
phase 1, GE was known for manufacturing quality products like light
bulbs, refrigerators, jet engines, and aircraft super chargers.
GE's slogan was 'We bring good things to life.'
In the second phase, GE ventured into television and high
finance. GE Capital, GE Commercial Finance, GE Money, GE Consumer
Finance and NBC Universal contributed an ever-growing slice of GE's
GE's focus shifted from manufacturing to financial engineering.
If GE didn't build a product it would finance the consumer's
purchase of a competitor's product. It was just appropriate that
GE's slogan was changed to 'Imagination at work.'
The 'New Normal' - New but not Normal
The concept of making money by using money, encouraged by the
Fed's interest rate policy, lacked substance and sustainability.
The 2000 tech (NYSEArca: XLK) crash was more pronounced than what
we've seen from the decades before. The real estate boom was as
gigantic as its subsequent bust.
The post-2007 financial crisis further highlighted the dangers
of an economy low on manufacturing but rich on leverage, accounting
tricks, and financial engineering. No wonder the average GDP for
the 2001 - 2010 period - dubbed the lost decade - dropped to
But amnesia or selective memory loss, usually triggered by
rising prices, is not new to investors. The more stocks rally, the
more excited investors become, the more dangerous the stock market
Building an Air Castle?
The post meltdown economy has become a launching pad for the new
economy and new key players. Facebook and Twitter are Wall Street's
new darlings. Investors can't wait to get their hands on the
According to Wall Street valuations, Facebook is worth as much
as Home Depot or Boeing. Home Depot employs 306,000 workers, Boeing
154,000. Facebook sends paychecks to about 1,000 lucky
A happy go lucky investor looks at the new economy and says
'Wow, that's just marvelous.' A skeptical mind looks at it and
wonders 'How long before that blows up in my face?'
As the economy is weakening, the Fed's role in providing
sufficient liquidity to keep a faux system running is ever
increasing. Stock market tops and bottoms have become more extreme,
and the boom-bust cycle is shorter than ever before.
An 80-year trend line that has contained the Dow Jones for much
of the 20th century provides an interesting technical reference to
this discussion. On February 18, the ETF Profit Strategy Newsletter
highlighted this trend line, which runs through Dow 12,400.
Interestingly that very day, the Dow rallied to 12,391 before
reversing 300 points lower. Perhaps the tug of war between the
economy and stock market has entered a pivotal juncture.
Bullish investors will quote the third presidential election
year, a willing Federal Reserve, positive momentum, and cash on the
sidelines as reasons for higher stock prices.
Bearish investors can point to extreme sentiment readings,
bearish divergences, valuations, and bad fundamentals as culprits
for lower prices ahead.
Slice & Dice but Watch your Finger
However you slice and dice it, the market is treacherous and can
make you rich or strip you of your wealth faster than at any other
time in history.
One way to limit risk and maximize opportunity is to pay
attention to trend lines such as the one mentioned above. The
market draws trend lines and creates important support and
resistance levels. If the market speaks, it behooves us to
A break below support is as bearish as a thrust above resistance
is bullish. Being unaware of crucial support/resistance level is
like driving down a busy road without paying attention to red or
green traffic lights.
Profit Strategy Newsletter
consistently monitors the market's vital signs and identifies
critical short, mid and long-term support/resistance levels
designed to put the odds of investing in your favor.