Economy Still Whistling Past the Graveyard

01/23/2012 8:15 am EST

Focus: MARKETS

Jack Adamo

Editor, Jack Adamo's Insiders Plus

There has been some good news out in the early weeks of 2012, but there's still plenty of overhang on these markets, writes Jack Adamo of Insiders Plus.

Frankly, in the last few weeks I was beginning to wonder if I’ve been wrong about the economy and jumped to the short side too early.

That uneasiness was compounded when I heard recently that consumer credit had expanded in November by more than 10%, the largest percentage in ten years. (The December stats don’t come out until February.)

I knew that the savings rate plummeted, but still thought the increase in credit looked like rising consumer confidence was finally starting to result in action. Then December consumer retail sales were released.

Retail sales rose 0.1%. That’s a very ugly number no matter how you look at it. Multiply it by ten and it’s still an ugly number.

Was November’s credit expansion a one-time freak occurrence of “What the heck, let’s splurge on Thanksgiving and shop early for Christmas?" That seems highly unlikely. Very few people finish all their Christmas shopping before December. And how big can a turkey get?

What seems more likely to me—and it is a scary thought—is that all that credit expansion and no follow-up in sales means that people with cash weren’t spending it and people with no cash were hitting their credit cards just to get by.

There was another reversal as well. Initial Unemployment Claims have been falling in recent weeks too. But those are the seasonally adjusted numbers usually used by economists. The unadjusted number was 642,000, up 107,000 from the same week last year.

Yes, you read that right, 107,000 more unemployment claims than the same period a year ago. After a full year, you still have the numbers going in the wrong direction—by a lot.

Meanwhile, housing prices continue to drift lower. The S&P/Case-Shiller 20-city index was down 3.4% year-over-year in October (most recent figures), and has fallen in every month since April. To paraphrase Clemens, methinks that reports of the bear market’s death are greatly exaggerated.

I should also point out that Market Vane investor bullishness jumped to 59% this week. That’s a sentiment level at which many a slide begins, though it may take a few weeks.

In addition, the S&P’s RSI hit 65 this week. I’m not going to try to explain the relative strength index, but 65 is the level at which the steep drops in July and late October began. So, some technical indicators along with sentiment are both at levels that have invited substantial pullbacks in the past.

Whether that would follow through into a resumption of the bear market remains to be seen. First let's see if we get the pullback.

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