USA Stock Markets Close at Five Year Highs

The USA Markets closed at five years highs on for the week ending Friday, September 7th.

The Nasdaq closed at 3,136 –  it’s highest levels since the year 2,000.  The S&P 500 closed at 1,437, it’s highest level of this current five year bull run from the lows of 666.

The S&P 500 has now rallied 13% off it’s most recent lows in early June, 2012.

Technically speaking, the S&P 500 recorded a double top breakout on Thursday of this week.  The previous highs for the S&P 500 were achieved on April 2, 2012 at 1,419 and again on August 20, 2012 at 1,418.  We illustrate this double top breakout of the two recent highs on the chart below with the two arrows.

 

(Click on Image of Chart for a Bigger Picture)

 

For Investors who are long stocks, Double Top breakouts are a bullish technical indicator as traders will cover shorts and go long when a double top is exceeded.  Note the sudden acceleration to the 1,437 level on the chart below once 1,419 was successfully cleared.

As we have written about earlier, the USA markets and economy continues to outperform the rest of the world economies and markets.

 

A Mixed Bag of Economic News

The economic reports for the week continue to show a USA economy that at times acts slightly strong and then a month later slightly weak again.  The net result seems to be an economy that has been and continues to grow at a rate of 1.4% – 2.2% GDP growth.  At this growth rate, it is very difficult for the economy to create the number of jobs necessary for the unemployment situation to improve significantly any time soon.  We comment on this a little more later.

 

For the week of September 7th, the Economic Reports came in like this:

  1. ISM Manufacturing came in at 49.6 – Weaker then Expected
  2. Construction Spending  report at -o.9 – Weaker than expected
  3. Monthly Jobs Report – 96,000 jobs created – Much Weaker than expected
  4. ISM Non- Manufacturing  came in at 53.7 – Stronger then expected
  5. Initial Unemployment Claims were 8.1 – Stronger  then expected
  6. Total Vehicle Sales – 14.5 Million – Highest level in five years

While the excellent number of total vehicles sold last month is a positive data point,  I was reading a report this week that indicates that the strength in auto sales is really a story of more risky financing being available to consumers once again than what had been available in 2009 & 2010.

Another factor for the strength of auto sales over the past 18 months is that a much higher percentage of people are taking out their car loans for longer periods of time (say 5-7 years) then the typical length of time for car loans that were made earlier in the decade (typically 3-5 years).

 

Unemployment Continues to be the Big Economic Challenge

The Monthly Job report of only 96,000 net jobs created demonstrates the economy is still far from levels that have enough power to generate enough new jobs for the record number of people who are either unemployed and underemployed.

Below is a summary from Reuters of the four main charts that measure the employment and unemployment condition in the USA today.

 

(Click on Image of Chart for a Bigger Picture)

 

All four charts are troubling but of most concern is the bottom two:

  1. The Labor Force Participation Rate of 63.5% – The lowest since 1981.
  2. The Average Unemployment Duration of 39.2 weeks – This record high level had stubbornly refused to go down for two years now.

For a point of reference for our readers, the USA economy needs to produce at least 120,000 jobs a month just to keep up with the natural population growth in the country.  This means that the economy must generate over 120,000 jobs each month to start to make any dent in the number of people who are unemployed.

As the above charts illustrates, the labor market continues to remain under duress.

The weak employment report had another very large economic impact this week – the markets interpreted the weak results to mean that Ben Bernanke & the Federal Reserve now have a green light to begin QE 3.

 

Like Higher Stock & Gold  Prices?  Then Just  Print More Money (QE3)

In our chart of the S&P 500 above you can see how receptive the investment community is to more money printing.  This weeks ramp in the S&P 500 to record levels came from the European Central Bankers announcement of their first round of Quantitative Easing.

Over in the USA, our Central Bankers  can use the Fridays job report (as discussed above a weak 96,000 Jobs created in August) as reasoning to begin Quantitative Easing Program 3 (i.e. QE3).  The response by Gold and other precious metals to QE3 was immediate.  We have prepared a chart which illustrates this:

 

(Click on Image of Chart for a Bigger Picture)

 

We alerted our readers to our belief that Gold was positioned to outperform in this article on May 19, 2012.  On Friday gold rallied $40 – more than 2% – on the weak jobs report and the expectation that now the Federal Reserve would soon implement QE3.

As bullish as we have been on Gold, we do not recommend chasing gold now after this sharp move higher in price.

 

Forecast For The Next Week

As discussed in the introduction above, a double top breakout is a bullish sign for a market.  However, we are never chasers of stock or any other asset prices that are at multi-year highs.  Typically, assets at multi-year lows get us much more excited.

The S&P 500 is  13% higher from it’s recent lows on June 2nd.  Therefore, now is a time to hold positions that portfolios are positioned long in and wait for an inevitable correction before adding new or additional long equity exposure in USA markets.

We would like to point out to our readers that while the S&P 500 is now at multi-year highs, the Shanghai Stock exchange is at multi-year lows.   For investors who are looking to add incremental exposure at this time , we would would suggest to  start your due diligence with the Shanghai and/or Emerging Markets who are all down significantly from their multi-year highs.

We still recommend that now can be a good time for portfolio’s that are heavily weighted in equities to use this strength to selectively trim the positions that are outsized so that a pool of funds are available to put to work at a future date when prices are not at multi-year highs.

 

 

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