Crude Oil Under Pressure From Rising US Production

Crude Oil is about to break its 13 month uptrend as rising US crude production is starting to break down the price of Crude Oil. This is despite OPEC announcing a supply cut some months ago to help stabilize the price of Crude Oil. 

If you take a look at the chart below of US  Crude production and Oil Rig count within the US, they both seemed to level out around September / October 2016 just as the last leg of the downtrend  of Crude Oil was playing out. Since making the lows late last year the rig count has been steadily rising with production levels rising along side the rig count albeit on a 1 - 2 month lag.

Record US Crude Production Leads To Record Glut

Since US crude oil production has been soaring for several months now, inventories have also been rising along with rising production. Compounding the issue is the US economy which has been slowing for close to two years now. Now the decline in the US economy is accelerating consumption demand for gasoline within the US is also falling. Hence you will notice on the chart below on the right the sudden spike higher in inventories. 

Crude Oil Monthly Chart Review

Since making multi year lows back in February 2016 touching USD $26.14 a barrel, Crude Oil had been steadily climbing for around 13 months. After closing above its downtrend line back in April 2016, Crude continued to march higher for the remainder of 2016 and into early 2017. With just 1 trading week left in the month of March, unless there is a major reversal this week Crude Oil is set to close below its 13 month uptrend with a large red candle.

Crude Oil Heading Towards $41.50 Target

Based on the current outlook of the Monthly chart with a clear break of the uptrend currently occurring for Crude Oil, the next level of support on a monthly chart is around the $41.50 - 60 level which is another $6.50 - $6.60 or 13.75% lower from the current price.

Looking at the momentum indicators below, they are both supporting the current weakness in the price, as Momentum even though is still positive is heading back towards zero. The stochastic momentum indicator is also showing that based on the current price of $48 would form a bearish cross. (See circled area within Stochastic indicator) Monthly stochastic indicators are usually more reliable indicator of change of trends as they are much longer time frame and take a long time to form.

Hedge Funds Change Direction As Crude Oil Prices Shifts

Up until as recently as February 2016 Hedge Funds had placed a record amount of long contracts (betting on higher prices) for Crude Oil. Since then Hedge funds have begun to reverse their bullish bets setting a new record for reducing the bets for higher prices. The swift change in sentiment among Hedge Funds and Traders was due to the price falling below the physiological $50 level.

Crude Oil - Weekly Chart Review

Taking a closer look at Crude Oil via the weekly chart you can see that the price tried to break higher numerous times back in January and February this year. However after reaching the the $53.80 - $53.95 level on several occasions the price collapsed a few weeks with a long red candle which I have circled on the chart.

Momentum Falls Below Zero

Momentum is currently sitting at -5.74 on the weekly chart having closed below zero in the first week of March as the bulls became exhausted and finally gave in to lower prices.

The weekly Stochastic momentum indicator has been falling for several weeks now confirming the weakness in price. Since both indicators are supporting the falls in price on the weekly and monthly chart, it suggests that there is a high probability that the weakness in Crude Oil will continue over the medium to long term.

Since Crude Oil has confirmed a close below the weekly uptrend 3 weeks ago, the next level of support on the weekly chart is $40.50 a barrel.

Watch For A Surprise Reversal Above $54

Although very unlikely to occur over the coming weeks, I suggest watching out for a potential reversal in price back to the current resistance level of just below $54 a barrel. There may be another attempt to break above $54 but will unlikely succeed with current oversupply issues facing the market with rising US production.  The reason why I suggest looking at for the reversal is if OPEC announces further cuts to their supply to attempt to stop the falls in price.

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Rising Rates About To Crack The US Economy Under Record Debt Levels

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Disclaimer: This post is for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.

US Interest rates have been steadily rising since the lows in July last year, as the market reacts to both inflation pressures, FED commentary and 2 rate rises in 15 months. As a consequence interest rates have risen around 1.2% for US 10 year Government bonds since July 2016. Rising rates has created a major headwind for the US economy, as the weight of the massive debt levels for consumers and companies are starting to have a weakening effect on demand dragging the US economy towards slower growth. In spite of slowing growth economy the US stock markets are or near all time record highs as bullishness over the Trump presidency have overridden a weakening macro environment as stock investors look to the future with optimism.

Market Pricing 100% For FED Rate Rise For March

Over the last few weeks the probability of FED rate rise in March has been climbing, as a series of press releases and comments from various FED officials, including FED chairperson Janet Yellen have shown their eagerness to raise rates this month. Due to FED officials comments the market has priced in a 100% probability of rate rise when the FED holds their Federal Open Market Committee (FOMC) meeting and release their statement on the 15th March US time. 

US  Government 10 year Bond Yields Set To Break Out Towards 3.00%

With the recent talk regarding interest rate rises by the FED this week and the market now pricing a 100% certainty of FED funds rate rising by 0.25%, Government bond yields have once again started to climb higher for two straight weeks reaching previous resistance of 2.62% last Friday. (See chart below)

The important factor to note for the 10 year bond yields is if the 2.62% level is broken and closes above the resistance level indicated for the week, we will see interest rates move progressively higher towards 3.00% which is the next level of resistance.

Higher Rates To Hit Corporate & Consumer Credit Debt At Record Highs

If US Government bond yields move towards 3.00% over the coming months, a situation which is likely if the FED raises rates this week. This is going to have a major effect on slowing the US economy even further. The extremely high debt levels in the US, that were built up during a low interest rate environment created by the FED is now beginning to cause some serious problems for the economy and eventually stocks as well with small increases in rates having a larger impact on considerably higher debt levels.

The reason rising US Government 10 year bond yields is such an important factor in determining the health of the US economy, is because the majority of debt products for consumers and companies are priced from Government 10 year bond yields. In other words everyone will experience a rate rise and be negatively effected because the US is drowning in debt, with consumer credit and companies debt levels excluding financials are at record highs. (See charts below)

Crush The Market addressed the negative effects that a significant rise in rates would do towards the US economy back in November as rates began to spike higher in November with the election of Donald Trump. To view this article click the link below:

Surging Bond Yields Signalling Pain Not Growth Ahead For US Economy

Since November's article the rise in yields has played out as predicted with a slowing in a number of key macro economic data announcements, as the economy continues to slow in a rising interest rate environment causing pain for consumers, companies and the economy overall.

Consumer Credit  Debt Led By Student & Auto Loans

The picture is no different for the average consumer who is struggling under record levels of debt, with debt levels rising by approximately 1 trillion since the previous peak reached before the global financial crisis in 2008 & 2009.

The majority of the gains in debt levels have come across from an exponential increase in student debt as tuition fees for college are far outpacing CPI increases. The other main contributor for such a significant rise in consumer credit has been the boom in auto loans to the average consumer. Auto sales had previously been booming from increasing in credit for a number of years. Now as consumers are tapped out with much more debt since 2009, delinquencies are rising in the auto loans market as higher interest rates are biting hard on consumers disposable income.

The rapid increase in debt since 2009 together with increasing rates since July last year, has already been felt within the economy as various parts of the economy are now showing further continued weakness.

Higher Rates Slowing Lending Growth For Consumers

The rise of around 1.2% in US Government 10 year bond yields since July has already started to impact demand for more debt by consumers over the last year. Since the start of 2016 loan creation growth has slowed dramatically from between 9 - 10% per year to a current growth level of between 4% - 4.6% pa. Although the growth rate are in the positive the accelerating of debt growth levels is impacting retail sales within the economy. For example auto sales from the Big 4 auto manufactures have fallen by up to 11% in January 2017 from a year ago. To view auto sales data shown in my recent US economy article Click here.

Atlanta FED Slashes Q1 GDP Forecast to 1.2%

In the beginning of February this year the Atlanta FED forecasting team had set Q1 GDP as high 3.4%. Since February economic data has been released showing further deterioration and slowing in the economy with economic data missing expectations. As a result of this the Atlanta FED has had to  continually reduce their forecasts all the way to 1.2% as of March 8th. Depending on pending new economic data releases in the coming weeks we could see Q1 forecast fall below 1%.

US Gasoline Sales Begin To Fall Again

US Gasoline sales have been in structural decline for several years now, as the chart has shown below falling by over 50% since 2005.  After reaching the lows in 2014 gasoline sales began to start rising again as the economy began to gather pace as jobs and debt accumulation began to accelerate. However recent data has shown Gasoline retail sales have once again resumed their downward trend and starting falling as weakness in the economy  from higher rates is started to effect consumer demand.

Federal Government Receipts Now Negative Y/Y - First Time Since Last Recession

Similar to Gasoline sales US Federal Government receipts were growing strongly up to 2014 reaching a growth rate close to 14% y/y. Since 2014 recent high Federal Government receipts have been falling dramatically over the last 2 years, having just recently turned negative falling -1.1% Y/Y for the first time since the last recession in 2008 /9. (See chart below)

Having a closer look at the chart on the right hand side, you will notice that the majority of the decline in growth rates occurred over a relatively short time frame in 2016. This coincides with the similar time frames when interest rates stopped falling and began to rise rapidly in the second half of 2016.

US Restaurant Operators Same Store Sales Falling

The most recent data available for restaurant same store sales has been released, showing that December 2016 same store restaurant sales are the weakest they have been for in 3 years. In addition Q4 comparable sales and traffic is also down from a year ago, indicating that the restaurant industry is reeling as consumers cut back spending out for food.

 Does A Rising Interest Rate Environment Matter To Stocks?

According to history a rising rate environment has serious implications to the future performance of the market. Since the 1970's 7 out of 8 occurrences where interest rates cycles began to tighten resulted in some large corrections in the stock market. With the last tightening cycle resulting in a 56% fall in the markets in 2009.

The tightening cycle has been running for close to 9 months now as has already had a major impact to the grow rates of the economy slowing dramatically over the same period. With the potential for another rate rise occurring this week, its quite possible we could see 3% US 10 year Government bond yields in the coming months playing further havoc on the economy. Based on the last 45 years of data a tightening cycle in the US has not be very kind to stocks either as the economy reacts to higher rates.

Warning! - The Insiders Are Rushing For The Exits

Company executives are selling around 10 to 1 relative to buying trades of company stocks despite record prices for stocks. The buyer / seller ratio is also on a downtrend since peaking in late 2015  and the beginning of 2016 (See chart below)

When executives are selling in such large amounts it usually means they are seeing the writing on the wall for future earnings and prospects for the companies they run. Perhaps since interest rates are rising and the economy is slowing its starting to place pressure on future earnings targets. The next quarter earnings may provide further insights, especially since companies are conducting record amounts of buybacks that are financed from previously low rates of  debt.

The recent strong performance of stocks in late 2016 and early 2017 has masked a serious deterioration in the US economy that started as early as 2014 - 2015. With interest rates about to break out higher on the way towards 3% we could see the last legs of the economy knocked out bringing stocks down with them as earnings will start to fall again with weaker consumer demand filtering through to lower sales results.

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US Stocks Bullish Run Fueled By Optimism Over Real Data

Since the election results in November US soft data (survey / optimism data) has deviated from hard data (actual US economic data). More importantly since December hard data has been falling as the economic news has deteriorated. Whilst soft data has continued to shoot higher along with a very bullish stock market. 

The Russell 2000 Index (Small Cap's) review shown below will show a very strong bullish uptrend. This pattern is quite similar to the 3 main stock indices DOW, S&P 500 and the Nasdaq. This highlights that the recent market surge in US stocks is more a function of market euphoria and optimism rather than actual improving economic activity and growth within the US economy.

Russell 2000 - RUT (Small Cap's) Chart Review

Monthly Chart

The Russell 2000 (RUT) has been in an uptrend for several years now as seen in the chart below. After a 3 year consolidation pattern of mostly sideways action between December 2013 - October 2016. The RUT index broke out of resistance of 1252 in November last year after the US election result win of Donald Trump, as all indices moved higher.

Currently the RUT has established a new uptrend within its larger long term uptrend shown with the blue line on the chart below. This uptrend started after the index gave a false signal when it closed below support of 1100 back in January 2016. After hitting the lows one month later the index has been steadily climbing.

Momentum Stalling - Consolidation Or Pullback Ahead

Since the RUT has had a strong 13 month rally in prices, the momentum indicators shown in the monthly chart are indicating exhaustion of the current rally.

I have circled both the momentum and Stochastic indicator to show that both are indicating a reversal of the strength in the market. Momentum indicator is still high however has pulled back to 2.80. The stochastic currently is sitting at a bearish cross as the blue line has crossed below the red. The last time the Stochastic had a bearish cross in July 2015 (circled on chart price action) the RUT index experienced a correction in prices for the next few months.

Since its only early March, it would be appropriate to wait for confirmation at the end of the month. If the momentum indicator is confirmed we could see the price action retrace back to the current uptrend shown in the chart at around 1315 - 1320 price range.

Since the bullish rally is quite strong its unlikely we will see a retracement back to support of 1252 - 53 level. Keep this target in mind though if we experience volatility in prices in March. Especially since the FED is likely to raise interest rates by 0.25% this month.

Weekly Chart

The weekly chart is showing a similar pattern to the monthly chart with the strong rally in prices since late November. Currently the price action is at or near the upper band of the uptrend channel shown in the chart below.

RUT experienced a strong burst in price around 5 -6 weeks ago as it made a new record high above 1400. Since then the price has been consolidating as it has struggled twice to climb back above the 1400 resistance level, with 2 weekly rejection patterns shown on chart as the price failed to stay above 1400.

Weekly momentum indicator is showing more weakness compared to the monthly momentum as it has made lower lows as it now sitting at 0.06 after reaching a high of 1.88 a number of weeks ago. This indicates the strength in the market that was present as the price made new record highs has disappeared. This explains the hesitation of the index to move higher.

The weekly stochastic indicator is also indicating exhaustion of the current rally and a consolidation or minor retracement in price is likely in the coming weeks.

The weekly chart pattern is confirming the monthly price action as the recent bullish run is running out of steam at least in the short term for now. Most likely the price action will move towards the lower uptrend channel band around 1300 - 1305 level. Based on the current bullish optimism its unlikely the price action will move towards support of 1282 - 84 level.

For confirmation of the retracement in price on the weekly chart, look for a weekly close below the 10 week moving average line which is currently at 1377 level.

Daily Chart

The daily chart price action as of last Friday's close on the 3rd of March is sitting just above its support level at 1,394. After breaking out approximately 2 weeks above the 1388 level the price action has been moving sideways and above its previous resistance level which is a bullish indication.

Contradicting the price action above the 1,388 level is that both Momentum indicators are showing a loss of strength in the market. Momentum has recently moved negative to -0.02 and the stochastic has also had a bearish cross a number of trading days ago. This means in the short term its likely we will see the RUT index close back below the 1,388 level.

If the index does close below 1,388 level, pay attention that the index stays within the previous sideways range between 1345 - 1,388. If the RUT index falls below 1,345 support level over the next 1 - 3 weeks the next target of support is 1,313.

Wildcard Event

Based on the strong bullish run of the RUT index and the major US stock indices, its unlikely we will see a retracement / fall in prices greater than 10% over the short to medium term time frame. However the FED will be meeting on the 14th & 15th of March to decide whether interest rates are rising in March. The decision will be made on the 15th. Based on prior announcements of a rate rise the market may experience with 1 - 3 days of the announcement a lot more volatility. If this was to occur we could see a mini panic of selling as the market digests the news. Therefore the wildcard this month is the FED announcement in the middle of the month that you should be weary of.

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Disclaimer: This post is for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.

US stocks are at or near all time record highs across all major indices, with the markets bursting out after the election win of Donald Trump back in November 2016. Since then investor bullishness has also spiked to 10 year high levels. While this bullish euphoria is occurring something else is taking place far more important. The US economy has been trending down for some time now and the slowdown momentum is gathering pace as it moves closer to a recession possibly as soon as this year.

Market Euphoria Clouds Judgement

The markets have a history of becoming totally blind to whats actually occurring in the real economy, instead focusing on the direction of the market to give them an indication of whats taking place. In the chart below you can also see that the composite bullish index (red line) back in mid 2007 was very high around 130 just before the markets began their 50% decline.

Currently the market greed / fear index (see chart below) is close to at the maximum level of extreme greed side, while the actual economy is rapidly declining with a similar dynamic playing out presently with a potential twist to the market outcome.

How Can The Market Be At Record Highs While The Economy Is Heading Towards Recession?

In a nutshell the answer is Central Banks, if you take a look at the chart below you can see how the Central Banks have massively increased their balance sheet since 2008 / 2009. This has been achieved by printing money and buying up assets to provide additional liquidity into the system. This extra liquidity has flowed its way into stocks all over the world, regardless of which Central Bank has been been providing the additional liquidity.

Recently though most Central Banks have once again picked up the pace in growing their balance sheet . So even though the US has effectively kept their balance sheet flat to slightly down over the last 2 years, the other Central Banks have effectively been adding to the pool of global liquidity pushing up prices of stocks, real estate and other assets. Clearly this practice is totally artificial and is giving false bullish signals to investors as the markets are not functioning on their own.

The S&P 500 Index No Longer Tracks Earnings

Further evidence that the Central Banks actions are providing false signals to the markets is shown in the chart below. S&P 500 earnings per share (EPS) are totally out of sync with the rise of the market and now represent a large divergence in their trends.


Earnings are now slowly tracking higher after falling for several years, however this is more a case of financial engineering of companies artificially raising their EPS by buying back their stock usually with debt. Since 2012 corporate profits are down so even companies themselves are misleading investors to the true financial health of their investments.

How Lower Corporate Profits Tie In With The Economy - Jobs, Jobs, Jobs

Since 2016 global employment in S&P 500 companies has been slowing down (see chart below) and late 2016 turned negative as the slowdown accelerated with employment growth. The last time this occurred the US economy went into a recession shortly after.

If you look at US non-farm payrolls you will notice that its also trending down but a slower pace.

The interesting point about the non-farm payrolls data is that the data each month is provided based on the combination of a Government surveys (small sample) as well Government generated predictions of jobs, Ie Birth death model of estimated new businesses commenced to produce the monthly result. Several months later up to a 1 year later the actual data collected from companies are imputed and adjustments are made on prior months. Usually the number of jobs actually created is readjusted lower. So the true effect of a slowdown with companies in the S&P 500 will not show in the non-farm payroll data for several months.

Every Time The FED's Own Signal Falls Below Zero Y/Y A Recession Occurs

Scroll video to 12min 52sec.

This video indicates that an indicator that the FED actually monitors has fallen -0.3 in December and has fallen 5.8% y/y, which is the largest since 2010. Each of the last 8 occurrences of this indicator falling below zero y/y has resulted in a recession in the US.

Consumer Credit Grow Demand Drops 43% Month on Month

In December consumer credit grew by $14.2 billion  a 43% drop compared to November's $25.2 billion. Since consumer spending makes up over 70% of the GDP data and the savings rates is falling in the US, a large drop in the amount of new credit card debt also points to a slowdown in retail sales.

The credit data below is actual data collected from the banks rather than from surveys, so it shows a very accurate picture of demand for credit card debt. Given the big collapse in S&P500 employments levels the trend in credit demand will likely continue to move lower and lower the GDP result.

FED Senior Loan Officer Survey Demand Falls Over

The overall trend for credit demand going forward is not looking good with the latest results from the FED senior loan officer survey. Indications for demand for debt for Construction, credit cards and auto loans are all down at multi year lows.

This is important as credit demand overall has been tied to overall demand within the economy and especially with consumers. If the intentions from the survey follow through, the slowdown in the economy will begin to gather pace with the higher probability of the US starting a recession in 2017.

Auto sales have performed very strongly since hitting the lows in 2009, with demand for auto loans driving a large proportion of retail sales demand. Auto sales have recovered strongly also because interest rates for auto loans have fallen substantially over the last 7 years from the FED dropping interest rates and pushing down bond yields via QE purchases. This has allowed buying a new car more accessible for consumers and allowed consumers to own more expensive models that previously they have not been able to afford on higher interest rates.

Auto sales Decline Y/Y First Time Since 2009

The strong performance of auto sales bubble appears to be over as December and January figures have been very weak. Making things worse y/y auto sales have recorded its first decline since 2009 the same year the US experienced a recession.

The data below shows the big 4 car companies in terms of autos units sold all experienced declines in y/y figures. Since the FED senior officer survey results for demand for auto credit is also falling, US car sales declines will  most likely continue in 2017.

With Record Amounts Of Stimulus Why Is The US Economy Weak?

Each month the Government releases the wages growth figures and overall they are usually positive rising slowly over time. The data that the financial media show is the data in the chart below (red line) which is nominal growth in wages. Since 2000 nominal growth has risen 40.2%, however when you take into account inflation real wages have declined 1.1% over the same period.

When the Government calculates inflation, the data they release is usually under reporting the true state of inflation due to various statistical measures like hedonics applied to the data to bring the level of actual inflation down. Therefore the average workers real wages have probably fallen by more than 1.1% since 2000.

Since the average worker has to spend more of their wages to buy the same amount of goods and services, this impacts on their spending power and ability to borrow. Lower spending and borrowing capability translates to weaker GDP growth since consumer spending makes such a large proportion of the calculation.

Weaker Economy = Higher Bankruptcies

The 2009 US recession caused bankruptcies to rise for several years and after peaking in 2011 the overall trend in bankruptcies continued to decline for the next 5 years as the economy recovered from record stimulus implemented by the FED and the Federal Government.

The declining trend has shifted when bankruptcies began to surge in November 2015 and continued to move higher in 2016. This has resulted in bankruptcies recording their first y/y rise since 2010 after rising 26% from the prior year.

Given bankruptcies is a lagging indicator due to the time required to process and complete bankruptcies, the deterioration of the economy has been occurring for an extended period of time now. Since other economic data  is showing further weakness, bankruptcies will continue to rise further in 2017 and into 2018.

Stimulus High No Longer Effective

Despite continuous stimulus of some form or another from Central banks and the US Federal Government growing their debt levels at record pace, the 2016 GDP growth came in at only 1.6% matching the 2011 low read after hitting 2.6% growth in 2015.

Based on the actual data from the US Government, the economy is slowing and no longer receiving a boost from the various stimulus options in place currently to support the economy, consumers and businesses.

Whilst the economy was slowing in 2016 another setback for the economy occurred in November last year, when the US 10 year Government bond yields soared over 0.60% within short period after the US election results.

Given the majority of consumer and business debt products interest rates in the US are priced from the 10 year Government bond yield rate, consumers and businesses effectively experienced two 0.30 rate rises over a 2 month period in late 2016. To view the article written back in November outlining the impact of higher Government bond yields on the US economy click the link below:

Surging Bond Yields Signalling Pain Not Growth Ahead For US Economy

A Rising Stock Market During A Recession Is A Possibility

After viewing this article you might come to the conclusion that despite the stock market sitting at record highs in the US, stocks are set to fall if an imminent recession is arriving in 2017. Well not exactly, since we are not in normal times and the actions of Central banks and the US Government are unprecedented.

When you take into consideration several of the previous FED QE programs occurred after US stocks began to correct by around 10%. In addition the odd market behavior in stocks over the last 6 - 12 months where we have not experienced a fall of greater than 5%. Its a reasonable possibility that stocks may stay elevated or even rise higher even if the US has an official recession. If this occurs this will be another new record in US history.

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The Election Honeymoon Is Over

It appears the honeymoon has ended for Trump and the markets after sparking a major rally in both the US dollar and the stock market since the election result.

The US dollar after topping at the end of 2016 has now started in a new down trend after falling steadily in January. It's now at the same level reached just after the election results in Mid November. (See chart above)

Over the last 2 trading days the US stock market has fallen the most in 4 months, as a series of actions taken by president Trump over its immigration policy in the last few days has shocked the market and brought about uncertainty and fear. Ironically the actions taken by Trump was already raised in his election campaign promises.

Adding to further uncertainty and fear in the market Trump decided to fire the acting attorney general for not following on his executive order over his immigration ban on seven countries. (For further information you can click the headline below)

DOW Reverses Breakout Trade

The Dow Jones Industrial index made a breakout out of its tight trading channel last week after moving sideways for nearly a month. However the last 2 trading days losses has seen the index fall back within the channel as the 20,000 level support failed to hold.

For traders and investors interested in the Dow index, watch the index to see if the previous support line shown in the chart will hold. A close below support could easily see the Dow fall back to pre-election results levels around 18,600.

Nasdaq Still Bullish Despite Uncertainty

The Nasdaq composite has been on a steady uptrend with little hesitation / pullback in price since the election rally begun. As a consequence of the strong uptrend rally late in the year the Nasdaq has made multiple record highs in January 2017.

Even though the index has fallen the last 2 days the index continues to remain well within the uptrend as well its current support. Compared to the Dow index the Nasdaq is showing strong bullish technicals despite the minor pullback in price from Trump's recent actions.

Note:

Despite the relative strong performance of the Nasdaq Composite, a potential close below its current uptrend line could see the Nasdaq fall back to the 5,500 level in price. With the current uncertainty and fear that is currently gripping the markets its quite possible for a reversal to occur.

S&P 500 - Hanging On To Breakout

The S&P 500 has experienced a minor pullback so far this week and depending on how you look at it, is just above or just below its breakout level that it crossed over in last week's breakout trade.

With the last 2 trading days showing some buying support despite falling both trading days, indicates the S&P 500 is likely to respect new support level around 2,275 - 2,278 in the short term. On the flip side with recent above average volume on both down days for the index does not bode well for market sentiment as fear remains within the market.

Weak Economic Data Adding To Market Weakness

Last Friday the US released its first look at last quarter's GDP as well durable goods orders for last month. Both pieces of key economic data missed market expectations, with GDP coming in at 1.9% versus 2.1% expectation. Durable goods missed heavily coming in at -0.4% vs 2.7% expected. 

Interestingly after the release of the key data the market barely responded initially. However after the unexpected immigration ban placed over the weekend by Trump's executive order and the firing of the acting Attorney General yesterday the market decided to react the recent deluge of negative news and shocks with the 2 day declines.

Market Bullish Exuberance Not Broadly Supported

Another key risk for the markets on top of the recent market uncertainties from Trump's actions, is the lack of bullishness among the majority of the stocks within the S&P 500. If you look at the chart below, the percentage of stocks above their 200 day moving average has diverged from the index back in September last year.  This indicates the larger stocks within the S&P 500 are driving the recent strong performance as the remaining stocks under perform. A divergence this large will most likely result in a reversal in trend to coincide with the overall strength of the index.

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China Braces For More Pain Ahead As Economy Slowdown Accelerates

To view my latest chart review on Gold click the link below:

Gold begins the year strong will the bullish run continue for 2017?

Disclaimer: This post was for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.

China's amazing GDP growth and recovery experienced since the 2008 - 2009 crisis is slowing down. The rate of growth continues on a downward trajectory, as more economic problems begins to emerge that are accelerating its slowdown for the economy and global growth. These problems have been building for some time now and many of the problems now faced by China have stemmed from the economic policy decisions that the Government implemented to fight off the last crisis.

How Did China's Economic Problems Start?

China's economic recovery from the 2008 crisis has been remarkable as the country was able to quickly adapt to the global challenges that swept through and effected its own economy. China was able to shift the focus temporarily away from exports, to their own domestic economy as they began to accelerate spending on fixed asset expenditure on various large infrastructure projects around the country.  This was funded by lowering interest rates and accelerating the use of debt to spur their own economic recovery. By implementing this strategy it also spurred demand for overall consumer spending as more credit began to flow through their economy. 

This strategy worked very well and within a short period of time the flow of credit and spending began to shift the growth of China's economy higher once again. As a result, it lifted the global economy higher as China grew imports to fuel its large fixed investment expenditure projects and increased consumer spending. This allowed many commodity based countries like Canada, Brazil, US and Australia among others to bounce back quickly from the 2008 economic crisis. The increase growth in consumer spending in China also facilitated countries with a large manufacturing base like the EU region to also return to growth.

As a direct result of China's return to strong GDP growth, global foreign capital investment in China  soared, as investors were attracted by the growth rates.

So why does China have some many problems effecting its economy in 2017?

One of the main causes is because China's economic recovery was predominately achieved by utilizing record amounts of debt to stimulate demand and now the debt load is becoming an anchor to their economy. (See chart below)

Before the 2008 / 2009 crisis, debt to GDP in China was moving sideways at around 130%, as new debt growth offset new growth in GDP.  After the crisis hit the debt to GDP skyrocketed, meaning the new debt was no longer having the same effect on demand and GDP growth like it did prior to 2008 -  2009 crisis. The probably cause for the shift in effectiveness on GDP growth after the crisis, was due to increased debt towards inefficient projects designed only to spur immediate demand regardless if the projects were financially viable.

Since demand  now has been effected by the debt levels of mostly inefficient debt accumulation, it began to hamper growth and the economy began to slow after a few short years.

Now that the economy slow down is accelerating, the capital that came from abroad during the China growth recovery, together with domestic savings of China's citizens is fleeing China, in search of new growth opportunities in other countries.

The capital flight of over $1.2 trillion since 2015, is impacting on China's financial system and its currency the Yuan as financial conditions have tightened. This has impacted demand in China as access to credit becomes more difficult. This in turn spurs more demand for capital to find a new home globally as the currency becomes weaker as well as growth.
 

How  Are The Economic Problems Impacting China's Growth?

Real Household Disposable Income Growth Falling

Prior to 2008 - 2009 crisis, China's real household disposable income was growing above 10% (See chart below). It reached a temporary high of 14% y/y on growth just after the crisis took hold as the stimulus spurred growth and incomes for a short period. After the crisis was in full swing the real household disposable income slowed to 6-7 % growth.

After peaking in 2012 income continued to decrease, as it made its way to just above 4% growth in real household disposable income in 2015. A level of growth that was considerable lower than the trough reached in 2009.

Since the new debt that flowed into the economy during the recovery was not introduced in an efficient way, the increased debt provided only a short term spike in growth rates. This most likely caused the slow down in real household disposable income growth as the debt began to wane on overall demand rather than expanding it.

China's Capital Flight Explained

The flow of capital leaving the country has been accelerating in late 2016 and 2017. This short video below explains why the rush of capital out of China is occurring.

China Tries To Stem The Capital Flight Problem

Since record amounts of capital is continuing to leave China each month it has placed an enormous amount of pressure on the financial system, as the outflow pressure is tightening financial conditions and liquidity within China. To tackle the tightening conditions, the Chinese Government has been adding massive amounts of liquidity that spiked in 2016 to attempt to stem the pressure. While they continue to add billions in liquidity the People's Bank Of China (PBOC) have had to sell their foreign reserves assets to fund their liquidity injections and support the currency.

The Outflow Pressure Continues In 2017

The chart below highlights the fact that China continues to struggle with managing their financial conditions as their financial system has once again required a surge of liquidity injections to ease the tightening conditions. Over the 5 day period from the 16th to the 20th January 2017, the PBOC had pumped in $1,130 billion Yuan into the system.

Without these injections the banks would face a cash crunch and the whole system would seize up and their economy would go from slowing growth to a crash in GDP.

Defending The Yuan To Slow  Capital Flight

The existing policy of China is to have an orderly and planned depreciation of the Yuan currency relative to the US dollar, in order to keep their export driven economy competitive internationally.

However, as the capital flight began to increase in reaction to the Government decision to devalue the Yuan by larger amounts in August 2015, the currency has become more volatile on the market as the Yuan began to depreciate at a faster rate to what the Government had planned. To reduce the pace of devaluation, the PBOC has been actively supporting the Yuan by selling their foreign US dollar reserves to allow the Yuan to appreciate and offset the selling demand from capital leaving the country. By engaging in continuous support of Yuan they have depleted their reserves of US dollars by over $800 billion to support the Yuan.

Depleting Foreign Exchange Reserves

Since the Yuan is pegged to the US dollar, with a small allowance for market swings from the set daily spot rate, the Chinese Government has created another problem as it tries to control their currency devaluation to spur exports. The PBOC is rapidly depleting its reserves to control Yuan currency market. With the current pace of depletion of reserves the PBOC will run out of foreign reserves in only a few years time. So their current strategy to control the exodus of capital leaving their country by actively intervening in their currency is running out of money and time.

This is why the calls from economists around the globe to allow their currency to be fully floated rather than be pegged is growing. This will allow the PBOC to retain their reserves as they no longer need to intervene. The downside is that the reaction from the market from a free floating dollar is that the currency will most likely experience a sharp fall once floated, compounding the problems for China.

Chinese Citizens Buy Bitcoin To Protect From Devaluation Of The Yuan

The Chinese people are fully aware of the Governments plans for a continued devaluation of the Yuan as one of the economic policies to spur GDP growth for China. This has led to Chinese citizens sending large amounts of their capital in 2014 & 2015 overseas to purchase foreign assets like real estate in Vancouver, Sydney and New York to protect themselves from devaluation. To combat this the Government has implemented stricter capital controls to slow the capital flight by limiting the annual limit of capital leaving China to $USD 50,000 which is one of the many recent capital controls put in place by the Government.

To get around the capital controls the Chinese citizens have had to become creative and finds new ways around the capital controls. One of the big trend in 2016 to get around the capital controls, was to buy Bitcoin in China.  When they want to sell their Bitcoin investment, they sell on a foreign Bitcoin exchange rather than the Chinese exchange meaning their capital is now outside of China.

This strategy became very popular last year and was one of the main reasons why Bitcoin was the best performing currency in 2016 with an approximate 100% return priced in Yuan / Rmb currency. (See chart below)

If the Government decided to also crack down on the use of Bitcoin as part of their capital controls, we could see a sizeable correction in the price of Bitcoin in 2017.

Global Economy Slowing As Trade Volumes Show Anemic Growth

Global trade volumes are barely growing and have been experiencing anemic growth since 2012. (See chart below). Like many of the charts shown in this article, there was a spike in volumes in 2010 as stimulus measures impacted on trade volumes as they spiked to just under 20% growth. After the stimulus waned the growth rates collapsed as well and now are barely growing.

Since China is a major trading partner with most countries the trade volumes growth doesn't bode well for its exports. Together with China's other economic problems, China will struggle with its GDP targets for 2017 due to its export weakness. This is especially true as it appears that the low growth in volumes is slowly heading towards 0% growth.

Global Export Values Slowing

The global trade values show a similar picture to the trends experienced with trade volumes globally. After experiencing a sizeable correction in trade values in 2009, global trade was able to rebound and make new highs. However since 2010 - 2011 the global trade values have been trending sideways, with the last 2 years showing that global trade values have been steadily falling.

China's Growth Engine - Exports Records Worse Slump Since 2009

Recent data released last week showed that China's exports recorded its biggest fall in exports since the 2009 slump. Exports actually declined by 7.7% in 2016, while China's imports also slowed by 5.5% as their economy internal demand for goods continued to decline.

Now President Trump is officially in office, the Chinese Government are worried about the implications of an impending trade war that could begin under his Presidency, as he tries to restore jobs and begin to increase manufacturing of goods in the US. If tariffs are implemented in the US on foreign goods as previously suggested by Trump, China's exports would fall even further in 2017 and beyond which would encourage more capital to flee China.

China's Key Economic Data - All Trending Down

The four key areas the world monitors to gauge the health and prosperity of China's economy are GDP, Industrial production, retail sales and fixed asset investment. From the most recent data available provided by the Chinese Government (see chart below), you can see the long term charts of all 4 data areas, are trending down from 2010. The official economic data even though may be overstated by the Government on the true state of the economy, reflect the consensus that China is slowing by its own metrics.

The Market Reacts To A Slowing China

The market has taken notice on the shift of China's economy and the problems its currently faces, as traders have been steadily increasing the bets on the Chinese stock market that it will fall. The percentage of shorts over shares on the China A shares ETF has jumped from 1% in September 2016 to 13% in January 2017 as traders prepare for a correction in the stock market based on a deteriorating economic outlook for China.

China's Economic Challenges Face No Easy Solutions.

This article highlights the many issues at play contributing to China's slowdown of the economy for 2017. There are however several more issues currently at play that are not covered in this article.  See below a short video to highlight some of the problems discuss in this article, as well as others  not addressed that China need to solve for the long term viability of the economy and its people.

China & Global Economy Fortunes Tied Together

The implications of China's problems on the global economy are real and significant as the world relies on China's annual GDP growth to fuel global GDP growth. China also relies on the global economy for its export growth. This means that if China's growth slowdown is gathering pace in conjunction with global trade stagnating, it would appear the global economy is heading for another slowdown. If the slowdown persists this could easily turn into a recession. The only difference this time compared to  the 2008 - 2009 crisis, is that the stimulus plan that will be implemented by Central Banks and Governments might not work as effectively. This is because the global economy has already been subjected to at least one or more forms of stimulus continuously for the last 8 years to support global growth.

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China's debt bubble threatens global growth as debt to GDP nears 300%

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Gold begins the year strong will the bullish run continue for 2017?

Additional Sources:

Ft.com - Subscription required
Afr.com
The-japan-news.com
Chinatopix.com
Theguardian.com 

Thank You For Your Support

I would like to personally thank all the viewers of Crush The Market.

Crush The Market has been running for only a couple of months now and already I have received so much support, with followers sharing/liking posts.

Without you the viewers, there would be no Crush The Market, so thanks for providing the opportunity to share my thoughts and ideas to you in 2016.

I would like to also wish everyone Happy Holidays and a safe and relaxing time off over this period.

Holiday Reading / Entertainment

For any one who may of missed a previous macro article or wants to refresh on some of Crush The Market 2016 macro posts you can view them below:

The Perfect Storm Set To Pop Aussie Apartment Bubble Bringing The Economy Down With It

Surging Bond Yields Signalling Pain Not Growth Ahead For US Economy

US Economy Continues To Weaken As Warning Signs Flash Recession Ahead

How We Lost Control Of The Real Economy By Trying To Control Everything

Global Real Estate Bubble Begins To Pop Like Dominoes

Macro Views On the US and Global Economy - Peter Schiff

One of my favourite places I visit weekly for macro views on the US and Global Economy is the Peter Schiff Channel.

If your not familar with Peter Schiff and would like to check it out click below:

www.youtube.com/user/SchiffReport

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The US election results are in and the US stock market is enjoying a sharp rally over the shock news of Donald Trump winning the election and becoming the new President elect.

On the back of the big rally in US stocks there has also been another big shift occurring in another very important asset class, US Government bonds.

US Government Bond Yields Surging

Since the news of the results of the US election were released US Government bonds have experienced a huge sell off in prices causing the yields to surge on Government bonds ranging from the 2 year bond all the way to the long end with 30 year Government bonds. (Note: Bond yields move inversely to bond prices.)

Specifically the US 10 yr Govt bond has seen the yield jump from around 1.80% before the election results to the current price of around 2.13%. (See chart below)

In the chart below you can see the magnitude of the rise in US 10 yr bond yield reaching the same level of the S&P 500 dividend yield.

Traditionally bond yields help to price the relative value of stocks. If bond yields rise the dividend yield on stocks would also have to rise. Usually stock dividend yields are above bond yields to entice investors to own riskier stocks over more conservative bonds. For the yield to rise on stocks either  dividends would need to rise and or stocks would have to fall in price to lift the dividend yields.

So the fact that the 10 year bond yield has reached the same level of the S&P 500 dividend yield means that a bond investor can receive the same yield as stocks without the perceived risk.

Normally when Government bond yields rises considerably it indicates that either inflation is also rising and / or the economy is accelerating it's growth prospects. When the economy start to accelerate its growth prospects investors traditionally buy stocks in anticipation of higher profits and dividends from a stronger economy and sell bonds which are considered defensive assets.

Many analysts and financial commenters have already come out and suggested that growth is now back on the agenda for the US economy since the electing of Trump as the new president. Because of the Trump factor these commentators have suggested this is the reason why bond yields are rising and suggest it's a positive.  

Why Surging Bond Yields Signals Pain Ahead

However we are not in normal times and there is a very big reason why the FED has spend the majority its balance sheet trying to keep US Government bond yields low, by buying them through the various QE programs and artificially forcing the bond prices higher lowering the yield.

It's also the same reason why the FED has only increased the interest rates once back in December 2015 and has been terrified to rise them further since then. The reason is because the US has a major debt problem from a Government , corporate America and consumer level.

So if the FED has tried all this time to keep rates lows, how is it all of a sudden a good thing for the Government, corporate America, the consumer and the economy that interest rates are now rising. Especially when the debt levels in the US are higher now than before the 2008 GFC event that shook the US and Global economy.

Increased Government Spending

Back in August this year Trump gave a short interview  with CNBC, discussing some of the problems in the US and how he was going to fix them.

In the video below he specifically discusses increasing spending on the military as well contributing over $500 billion to the ailing infrastructure in the US.

How Will It Be Paid For?

When asked by the CNBC host how will he pay for all the new additional spending he planned for the US economy. Trump said that he was willing to increase Government debt to fund it as one of the possible strategies. He further added that since interest rates are so low it would be wise to take advantage of the current low rate environment and borrow.

Bond Yields Reacting To Trump Plan

Now Trump will be the new US president I believe Government bond yields are surging not because growth will skyrocket in the US, but because they know that US debt under Trump will rise even faster than under Obama.

If Trump does plan to massively increase Government debt to pay for military and infrastructure spending, he is going to find out quickly that interest rates will not stay low for long.

Bond yields will continue to rise simply because bond investors will reprice US Government debt and the subsequent yield they will demand, to reflect the anticipated surge in debt coming over the next few years. The repricing of US Government bonds will occur to reflect the higher perceived risk of a potential default from considerably higher debt levels.

China Reacts To Trump Presidency

The Chinese Yuan / US dollar pair has been depreciating for while now, however the depreciation against the US dollar has accelerated recently. The currency pair is following closely with the US 10yr Govt bond yield since news of Trump's win was released to the world. (See chart below).

Since China is a large trading partner with the US and China holds a large portion of US Government bonds this is important, as the devaluation of the Yuan and its correlation to the 10 yr yield could indicate that China has accelerated its dumping of US Government bonds in reaction to Trump become President and the potential shift in Trump's trade policies effecting China.

China A Seller Of US Government Bonds

The chart below shows that China has been slowly selling US bonds since August 2015 reducing its holding from over $3 trillion to just below $2.8 trillion with the latest data.

If China decides to dump their holdings of US bonds rather than a gradual selling as has been the case, you could see US bond yields surging significantly higher due to the large amount China currently holds.

Once again given the high debt levels in the US this would create a lot of pain for the US, as US Government bond yields are used to price consumer, corporate, auto and housing loans. If the bond yields continue to rise it will squeeze the cash flow of debtors in the US and the economy will quickly feel the impact as the economy will buckle with higher interest rates. 

US Debt Obligations Impossible To Repay

A number that has been raised a few times recently during the lead up to the election results was the total US Government debt of around $20 trillion. However what vary rarely gets mentioned is all of the total obligations or promises that the US Government has made. These include the pension obligations, medicare, social security to name a few.

Ray Dalio from Bridgewater has put together a brilliant chart that encompasses all the Government IOU's as well private debt. (See chart below)

What you will notice is that on the right hand side of the chart that total US debt to GDP stands at over 1000% to GDP. This means that debt is over 10 times to the yearly GDP of the US economy and is too high for the economy to be able to effectively grow out of it. This explains why the US recovery has been so sluggish despite zero interest rates.

With such a high proportion of IOU's relative to the size of the US economy, you can clearly understand why higher bond yields will cause a lot of pain in the future for the US.

The previous chart above on the US IOU's is actually a global trend with many countries having a similar looking chart with Government and Private debt rising rapidly over the years.

When you take a look at the chart below on the left, you can understand why Central Banks around the world have struggled to lift rates over the last 5 years. The reason they have not been able to normalize is that debt levels globally are too high to sustain in any interest rate rise.

In fact over the last 18 months or so many Central Banks have cuts rates to further spur economic growth without much success.

Central Banks Stuck In Interest Rate Limbo

In previous economic cycles after Central Banks cut interest rates to stimulate the economy they were able to lift them higher as the economies expanded. However in 2016 the debt levels have grown so high relative to GDP just like the US, the global economy is no longer able to handle higher rates without crashing the Global economy.

As an example on the global debt problem, I recently wrote an article about the huge ballooning debt in China  and how its negatively effect the economy. See: Chinas debt bubble threatens global growth.

The only solution to the debt problem for the Central Banks (CB's) is QE liquidity injections to keep the status quo going. The chart below on the right shows the global equities market addiction to CB's liquidity, with a strong correlation to movements in liquidity.  What this shows is that stock markets follow CB's liquidity above the actual strength or weakness of economies.

We Have Reached Our Debt Limits

In September Ray Dalio outlined very simply that we have reached the Debt limits globally, and low rates and lower interest payments no longer work because the debt is too high to have any additional stimulus effect on growth. (See video below)

If you have not seen this short video before take a look to hear Ray explain the current problem the world is facing.

Higher Bond Yields To Cause Economic Pain

Therefore on the flip side if the debt is too high that low rates no longer cause an stimulus boost or economic impact, higher rates will negatively impact the US economy. This is because as higher rates ultimately reduce demand as higher interest payments take a higher share of disposable income and reduce overall spending power.

If overall spending demand is reduced in the economy this will lead into another recession or deeper economic crisis.

Considering the US economy is already weakening as recent economic indicators is signalling a slowing economy or even recession see: US economy continues to weaken.

Higher bond yields will therefore only tip the US economy faster into economic contraction.


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The US election results overnight stunned the mainstream media, wall street, world markets and millions of people around the globe. After initially falling sharply on the news, the markets eventually recovered and moved to finish higher as the mood turned from fear to bullishness.

Once the markets saw that Donald Trump moved to the lead early in the election results, the markets around the globe began to panic as the DOW futures was down over 800 points, the S&P 500 futures was down 5%, Gold jumped up over $50 and currencies moved violently as the odds turned to Trump becoming the new President.

Markets 180 Degree Reversal.

Once the S&P 500 futures fell by 5% the index automatically went to limit down, and temporarily stopped trading. Once trading resumed the S&P 500 futures began to slowly climb as the limit down measures meant the index could no longer fall more than the 5% level for the trading day.

Once the S&P 500 began to climb with the DOW, the massive fear that was gripping the markets slowly moved to cautioned optimism as the markets slowly crawled back the losses. By the time Trump was giving his President elect speech early in the morning US time, the DOW had recovered to be down 300 points. By the end of the trading day in the US with the results in for the new President the equity markets swung to a strong gain for the day.

S&P 500

The chart below shows that initially when the markets opened that the S&P 500 fell to the support level of 2125 before slowly climbing during the day for a big swing towards an up day closing at 2163.

Since momentum is now back into the positive and the S&P 500 closed above the 2157 resistance level the next target is 2190 which is back to it's all time highs for the broad US equity index.

US 10 Yr Govt Bond

One of the interesting swings in the markets overnight was in the bond markets. During the initial fear stages of the market the US 10 yr Govt bond yields fell all the way down to 1.70 level as investors moved into bonds bidding up bonds as the selling accelerated out of stock futures.

Like the equities market the bond market began to turn around and swing from a 1.70% yield on the 10 year to as high as 2.09% jumping by 20 basis points by the end of trade. Currently the 10 yr is sitting at 2.005 level.

The previous resistance level which is now support is around the 1.97/98 level, with the next resistance level for the US 10 yr Govt bond at 2.13%.

Lastly you can see that since June of this year that bond yields have been climbing since reaching the low 1.30's level and have broken its downtrend on a daily chart.

Crude Oil

Crude oil had a crazy day after having been down considerably to as low as $43 and change which was also a key support level, to a swing to the green rising to 45.25. Currently in the next day of trading crude is sitting at just over $45.

Crude is currently in a middle ground with no clear direction at the moment. Having said that crude recently broke its long term uptrend which is displayed on the chart by the blue line which is a bearish signal for crude moving forward.

The key areas to look out for in the medium term are $46.25 to the high side and $43.05 on the low side. We would need to see a break out in either direction to determine its next move.

USD/JPY

Currencies around the globe experienced violent moves overnight as the market tried to digest the news that many did not expect to occur within the US election.

The USD/JPY pair fell sharply initially to a low of 101.18, before climbing sharply during yesterday's trade to also climb into the green reaching a high 105.88.

The technical's for this pair has recently turned bullish, after reversing it's long term down trend and clearing the previous resistance level now turned support of 103.88.

Momentum has now moved positive and with the strong reversal intra day the next resistance level for the pair is 106.83. Currently it's sitting at 105.57 at the time of writing this.

EUR/USD

The EUR/USD pair had a similar outcome to the USD/JPY but in the opposite direction. After climbing strongly when news first came out that Trump was in the lead and looking likely to win the election. The EUR/USD pair jumped as high as the 1.13 level which also market the high end of the down trend level for this pair (see chart for trend line).

The currency also reversed course during the day and swung from a strong gain for the day giving up all the gains and falling for the day to reach a low of 1.090 level.

Momentum is only just positive and looks likely to swing back to the negative. The likely next stop for the EUR/USD is down to the next support level of 1.088 as shown in the chart below.

Gold

One thing that the gold bugs had expected was that if Trump would win that Gold would jumped sharply higher.

Unfortunately for Gold investors their prediction did not remain true as the trading day continued. Gold initially jumped spectacularly higher to a high of $1,336 for the day, before giving up practically all the gains to finish around $1,277 level.

Currently in the next day of trading Gold is slightly higher sitting at $1,286 at the time of writing.

Looking ahead for Gold it has 2 key levels to clear before it could regain it's uptrend. Its first resistance level is around the $1,305 - 08 level which it breached intra day but could not close above that level. If it clears this level the next level to close above is its downtrend line shown in the chart. During the highs reached Gold hit its downtrend at around $1,336.

XJO - Aussie Stock Market

Australia was one of the stock markets that was trading as the results were unfolding for the election yesterday. The Aussie market index the XJO was initially up in the morning when the market believed Clinton was winning. It quickly swung to the downside sharply following the US futures market, hitting a low of 5,052 which was around it's strong support level reached back in late June, before recovering considerably by the end of trade yesterday.

Today the XJO has risen sharply on the back of the swing in the US markets to around 5,300 level at the time of writing.

Since the XJO is currently sitting comfortably above its previous support level of 5,190, its next target is around 5,390 - 5395.

Keep in mind though that Momentum is still well in the negative at -142 as well as the current price is sitting below its 50 day moving average. The XJO would need to see buying to continue in the US markets to help lift the XJO out of its current slump.

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The US economy continues to show weakening conditions as new warning signs are flashing recession ahead. This is despite the best efforts of the FED and the US Government to ensure there is plenty of measures in place to continue to stimulate the economy.

Over the last few weeks we have received several economic announcements on the US economy, with a few positive or better than expected results. However the vast majority of announcements have been poor or woeful as the economic data continues to show further weakness within the economy.

US Q3 GDP - A Convenient Smokescreen

I know what your thinking, hang on a minute on Friday we had a first look at US Q3 GDP and the result was positive and even beat expectations. This is correct GDP came in at 2.9% beating expectations of 2.5% and smashing last quarter's result of 1.4%.

However I find the result convenient and timely considering there is an election in less than 2 weeks time. The second and third estimate for GDP could see considerable revisions lower after the election has ended.

The other interesting points about the GDP result was that a 1/3 of the GDP growth came from a one off exporting boost of Soybeans.  This is not a normal occurrence for the US however due to shortages in other countries due to crop damage, there was a surge in demand for soybeans  exports. The one off export surge contributed 0.61% of the GDP growth.

Another big factor for the surge in GDP was a large inventory buildup in the quarter contributing 1.17% of the GDP growth. The most likely reason for the surge in inventories is in anticipation of a big pickup in spending for Christmas. However as I'm about to show you below the US consumer is struggling to meet their living costs, as the consumer is no longer confident and struggling with price rises for everyday items.

In addition the majority of the job gains over the last 12 months have been in part time jobs and low paying services jobs like in restaurants and bars which typically bring in lower incomes. Therefore companies are going to find it difficult to clear all the inventory ordered in the Q3 for the coming quarter. This will lead itself to lower GDP result the following quarter as companies struggle to clear excess inventory over the holiday period.

Lastly GDP is measured after deducting inflation for the quarter. In the most recent quarter released last Friday the GDP price index / inflation was measured to be 1.4% compared to 2.3% last quarter. This means the Government is indicating that inflation has slowed considerably from the previous quarter. For everyday citizens in the US they know this doesn't make much sense as rent, food, fuel, electricity, healthcare and education continues to jump higher making it harder for average American's to pay for everyday items. If the GDP price index remained the same as the previous quarter at 2.3% the GDP would of been further reduced to reflect a more accurate measure of US economy.

Leading Indicator - Investment Swings To Contraction

Over the last 65 years you can see the steady decline in terms of investment as the US slowly began investing less into the economy with each economic cycle. More importantly each down turn in investment relative to GDP was a perfect leading indicator to a US recession, as corporate America cut back spending with each contraction within the economy.

The red marker's together with the red vertical lines on the chart represent  the start and ending of economic contractions (recessions) in US history since 1950.

Currently investment has again peaked within the new cycle and is now heading down indicating the US economy is about to head into a recession if the economy is not already in one unofficially. 

This short video below highlights the chances of a recession after an election is typically at 52%,  regardless of who wins the election. Over the alternative 2 year period of no election the chances of a recession drop to around 25%.

FED Chart Predicts Recession 71% Of The Time

This chart is one the FED monitors to determines the strength of the labor market. The vertical pink lines are previous recorded official recessions within the US since 1977. The circles are to illustrate each time the labor market conditions fall's below 0%. Since 1977 five out of the seven times or 71% of cases the index has fallen below zero the economy has fallen into a recession. Currently this Labor market conditions index has fallen below zero.

Consecutive Quarters Of Declining Earnings

Here is another chart showing US corporate profits going back to around 1950. The vertical red lines represents each time the US has had a recession since the 50's.

What you will notice is that each recession except one back in the late 80's resulted in corporate profits declining for consecutive quarters. Or the fact corporate profits fell consecutively leading to a recession most of the time.

Presently the US has had 5 consecutive quarters of corporate profits falling. The current quarter profit season is still in progress with high odds that we will make 6 consecutive quarters of declining profits. If this occurs this will the most quarters of profits declining without a recession officially occurring.

In this interesting video Wilbur Ross explains in a concise way the current state of the US economy. He describes the economy as weak and that market valuations are high. He also believes there  is no avenues for revenue growth for corporate America due to weakness currently in the economy, which most likely will lead to a recession. in the next 18 months.

No Revenue Growth = Business Cut Spending.

Last Thursday the US released durable goods spending which represents capital expenditure by companies. The chart below is the capital goods orders that excludes defense and Aircraft spending. This chart is important as it's a proxy for business spending in general and gives you an indication of the strength of corporate America.

If you look over to the right side of the chart below you can see that capital goods spending has basically been declining nearly every quarter since 2014. If the economy was strong companies would be investing in more capital goods to grow production and revenue. This would be from an increase in demand for the goods and services they provide. However the opposite is present as demand continues to fall leading to companies cutting back expenditure to counter weak demand.

The chart below coincides with the lack of capital spending for companies in the US. Because more companies are facing tougher conditions to grow their business falling to levels seen in 2014, companies have had to rely on cost cutting and stock buybacks to lift earnings per share (EPS) rather than on actual revenues increases.

With rates so low in the US at 0.25% it's not a good indication that business conditions are declining.

Poor Christmas Sales Foretasted

Consumer confidence continues to fall with the latest results on last Friday showing confidence dropping again to levels last seen in 2014.

Like I mentioned above regarding the huge inventory build of companies for the lead up to Christmas. Companies will realize in the coming months that this was not a good idea, as the consumer does not feel confident with rising prices and lower spending power from their paychecks, leading to lower spending than the previous holiday season.

Bad Debts Spiking In 0% Environment.

This particular chart shows the delinquency rate on company loans made by banks since the late 80's. The last 2 recessions the US had in 2001 and 2008, both show delinquency rates spiking before each recession occurred.

In the current business cycle delinquency rates / bad debts have spiked from below 1% to the current level of 1.6%. Keep in mind interest rates are currently at 0.25% having been at zero for about 6 years. Therefore rates are extremely low compared to previous business cycles yet companies are having trouble paying their loans.

The other troubling fact for the banks is that debt level for companies are much higher than the last recession. This is due to record low rates enticing companies to borrow to  start or increase stock buybacks and increase dividends. So any fallout from an accelerated delinquencies within corporate lending, will have a much  deeper negative impact to bank's solvency than the 08 recession.

Leading Indicator Small Cap Index  - Breaking Down

Small companies are traditionally a leading indicator of strength and weakness within an economy. When an economy is set to expand out of contraction you will notice that smaller companies tend to lead higher in price before large cap and blue chip companies do.

On Friday the Russell 2000 index which is the US small cap index broke a key support level on both a weekly and daily chart.  Even though the S&P 500 is still within record highs, the small cap index has broke away from the larger index as it has ended its long term uptrend as well key support levels.

If you would like to check out my chart review of the Russell 2000  breaking down click on the following link: Russell 2000 review

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