Technical indicators and screening measures were positive again Thursday while the market averages treaded water. There are lots of technical positives, but also some...
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Industrial Production was reported to have gained 0.6% in July on a seasonally adjusted basis, matching the consensus estimate. This was one of those rare occasions where the conomists guessed right. However, that’s not the same as saying the seasonally finagled number is accurate, or accurately represents the trend. It may or may not at any given time.
The actual, not seasonally adjusted number was down 2%. July is always a down month and this reading is a little better than average for this month but not as good as the past two years. It was down just 1.4% in July 2011 and 1.6% in July 2010. The average July change over the past 10 years was -2.8%.
The total index is smack on trend.
With Europe in a monster meltdown and China slowing, this number was actually quite good. That’s because the US, as the Last Ponzi Game economy standing, is benefiting from all the turmoil in, and capital flight from, Europe. Panicked, wealthy European individuals and institutions buy US Treasuries. The following week the Treasury spends that money, and voila, it shows up in US industrial production.
Stock prices had been heading toward an overbought level relative to industrial projection, but that stopped in 2011. The ratio of the S&P 500 to the Industrial Production Index has turned flat in response to the Fed holding the SOMA flat for the past year. Stocks may not be expensive relative to the economic data, but they’re not cheap either. If they should run to reach the 2007 highs from here, a gain of around 10%, they would be approaching a historical extreme, but if industrial production continues to expand at the current pace, there would be room for stocks to reach new highs.
I like this indicator because it is a measure that covers everything, not just manufacturing. I can’t think of too many businesses that don’t need electricity to run. When business is bad, electricity consumption falls and vice versa. In addition, when times are bad, people at home turn the lights out and turn the air conditioning thermostat up a degree or two. When people feel good about their economic prospects, what the hell, leave the lights on and turn the a/c down full blast.
The long term view of this indicator says that the economy has done nothing. The year to year data shows a decline of 1.9% from last July. The 12 month moving average is also slightly declining. This suggests that in total, the economy is not expanding. Other economic indicators reflect slow growth. Can an economy grow without increasing electricity use? Something is out of whack. Place your bets accordingly.
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