Slowing global trade and US economy

The collapse of Baltic Dry Index and commodity price indexes are well documented. BDI is at historic lows and and CRB is at levels last seen in recession.

Both point to rapid deceleration of global and especially Chinese demand. Less attention is given US trade that is rapidly slowing. The exports are down which is natural given the global weakness:

More ominously, imports are also down:

Container volume in west coast ports is down:

Overall, the picture painted by the trade numbers is negative. With leading indicators also down, 2015 may be less strong for US economy than predicted.

 

SP500 making new all time highs with weakening global economy

Greece and Ukraine are capturing news headlines while smaller news point to continuing global economic slowdown. First, the US growth barometer is still showing weakness despite a small bounce in oil prices:

This weakness is confirmed by ECRI weekly leading index:

The weakness in materials also shows in inflation which is at levels only seen in recessions:

Baltic Dry Index that measures the cost of bulk shipping is at historic lows:

Despite this backdrop, SP500 is making new highs. For time being, stocks have decoupled real economy and main news moving the market are related to FED interest rates. 

Credit spread recovering but not enough

Market is still trading in the range but internals have recovered a bit. Enough to reverse the bear course?

The credit spread below shows stabilization and a small uptick; however, the stock market is not confirming. The chart shows two other instances of credit spread leading the stock market down, recovering a bit but stock price fails to make new highs. Subsequently, the downtrend was quickly established for both. The lesson here is important. Unless stocks can quickly establish leadership here, we will likely start making lower lows.

Figure 1. Credit spread and stock market.

Figure 2. Shows the ECRI weekly leading index. It continues to show weakness. It is worth noting that SP500 is a component of ECRI LEI and LEI is down even with SP500 holding up. If the stock market starts loosing altitude, the ECRI LEI will follow.

Figure 2. ECRI LEI and stock market

Realities do not matter

It is clear that the market will go higher in absence of negative news. The following news could have been perceived as negative but they did not affect the market:

1. War in Europe (Ukraine) and Russia annexing its neighboring territory unilaterally. 
2. Recession in Japan. 
3. Slowing growth in China. 
4. Eurozone deflation. 
5. The most negative earnings guidance for SP500. 
6. Plummeting commodity prices signaling global slowdown. 
7. Almost total collapse of the world’s 9th largest economy (Russia). 
8. Utter collapse of Baltic Dry Index again indicating global slowdown. 

It is obvious that stock market has decoupled from realities. Equally obvious is that it is hard to predict when the reality will catch up with the market. The rising volatility, however, indicates that the market is on borrowed time.

Down, Down, Up, Down, Up

The last five trading days: SPY down 1.3%, down 1.3%, up 1%, down 1.2%, up 1.3%. In this context, today's action is not at all bullish but just another example of market confusion. Remainder: Stocks have decoupled from fundamentals such as geopolitical news or global economy. This is seen in the breakdown between US Growth Barometer and stock price:

Given the breakdown between stock price action and fundamentals, the day-to-day market action is unpredictable. Longer term, the fundamentals will act like gravity on stock prices.  

Up momentum exhausted

Since the last week's post "Situation unchanged", the market has turned more bearish. The breath indicators remain largely unchanged but the up momentum is now exhausted. This is seen for example in the oscillators shown below:

SP500 is at were in has bounced up now several times. Changes are that there won't be a bounce this time around and the market breaks sharply lower.