Economy starts to follow stock market higher

Apparently, the stock market was Super as well. The markets are starting to make new highs, get beyond 2008, and show some staying power. While the economy might not be Super, it is starting to show signs it no longer wants to qualify for the first pick in the draft.

We actually have some economic data to talk about for a change. The jobs number was much better than anticipated. The number was +243,000 while experts were looking for +160 so that’s good. The ISM manufacturing number was also better at 56.8 compared to 53.

Our take at the start of the year was things would get better. Why? After 5 years, its time. Remember, this came at a time when ultra bears were still looking for that Lehman moment in Europe. If you watch CNBC, there’s a commercial that repeats a dozen times a day about some guy predicting “a dire prophecy” for America in 2011. They still play that commercial only I think they had to scrub the 2011. What people don’t understand, especially economists are that social mood is fluid and you can never project the next 6-12 months the way the prior period materialized. Social mood is the single most important indicator when it comes to economic trends. We’ll take a page out of Prechter’s Socionomics and tell you that the stock market is the very best indicator of future economic activity in the world.

Coming into the New Year I knew and Lucas Wave clients knew that the bottom of the bear on November 21, 2008 was a rock solid 21 year cycle low based on the Gann calculations we’ve discussed in this space and in Futures magazine since the 2011 Gann article I did. The cycle’s reaction was hard to the downside, which is indicative of an end and on the other side straight up, which is indicative of a beginning. Consequently, while last year’s bear phase was devastating to so many given it was tied into the MF Global disaster, the truth is we never came close to the bottom. We never even seriously violated into the first half of the move leading into April 2010.

But at Lucas Wave we don’t guess or impose our will on the market. We look just look at the charts and combine it with market psychology. Not only that I showed you the housing chart.

Click chart to enlarge

When I showed you this the first time, it would have been good enough just to see it get to the line and not fall apart. It backed off the first time but look at it now! That tells you almost everything you want to know about the recovery. I’ll be conservative and not expect it to keep going but now that the 200 week is flattening out, it could at least permanently change its slope from down to flat. That doesn’t necessarily get us to prosperity but moves life in the right direction, finally.

Of course, we are not even close to being out of the woods and I’ll use myself as a contrary indicator and suggest to you I do get a little excited looking at this chart. Just because the line is pierced does it mean we have a breakout. Under one technical perspective when an important resistance line is pierced, the glass half full view is it’s been weakened forever and even if it falls back, any second attempt is more likely to get through permanently. I would suspect we could test around this line for weeks or even months to come. But the market is also at important time resistance levels and could fall back. But before we get to that lets look at the small details.

Friday could have been the classic buy the rumor sell the news kind of day. The most important aspect of Friday was the fact we had the good data and given timing conditions the market never went into sell mode. It didn’t go into sell mode either on the Fed day or anything else for that matter. One has to be concerned about being the last man into the sequence if for no other reason the VIX is dropping and now down around 17 which isn’t good. We know that sentiment could stay at extreme for a long time and should never be considered a sell signal. We finally got some honest euphoria into the market this week, first on the Facebook IPO data and finally on Friday with the jobs and ISM number. The public is not engaged in the market which probably rules out a very long term top but those participants who are involved are starting to get a bit too optimistic.

Another aspect of the rally is the continued good action coming out of Shanghai where it still has room to grow up to the high end of the median channel. We thought that if the rally didn’t collapse before they went on Chinese New Year holiday for a week it had at least another 100 points in it. So far so good. The chances of a top here while Shanghai continues to stay strong are small simply because it doesn’t kill off the risk on trade. But oil has been weak and finally starting to hit some important near term targets. The Dollar has stayed weak and we’ll look for another low in this sequence.

Finally, we know nothing bad happens to the market when the banks are participating. The BKX broke out to new relative highs on Friday again which negated a 2 week consolidation process.

Next page: What could stall the rally

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