It’s impossible to have a W shaped recovery without first having a V shaped recovery
Posted online 04/18/2010

We’ve all been hearing a lot of chatter lately especially from a certain “perma-bull" or two in the media about the fact that it’s a V shaped recovery. They can solidly say that it’s a V shaped recovery because it’s already done and too late to get in on a big portion of it. Although it is a V shaped recovery for the time being it may not be true in the near future and this is why.

Natural unemployment is 4%. Average unemployment has been holding steady near 10%. I believe these numbers are underestimates because it benefits the government and corporations (the stock market). Another reason that I feel they are underestimates is because of the way unemployed persons are counted along with the fact that many of these people have and are running out of benefits soon. Not every state is the same but many states have increased their benefits so that they last up to 40+ weeks. Over one year ago was the “bottom” and for many, those 40 weeks are gone and they still have a mortgage payment to pay. How do they pay it? That’s right, credit. Pretty soon those credit cards are maxed out and they’re defaulting on their credit along with being foreclosed on their homes. And thus starts the second wave of credit defaults and home foreclosures.

Why is unemployment holding near 10%? Companies may have transformed from labor companies to capital companies, but I feel the more likely version of the story is that each employee has taken on more of a work load to compensate for the persons that were laid off. What are they going to do about it? Complain? They can’t afford to be fired from their job in this economy. They’ll take on the extra workload due to fear of becoming part of that 10% that are unemployed and those that don’t take on that extra workload are easily and quickly replaced with someone that will take on the extra work load.

Another thing I’ve been hearing a lot in the media is all this money that’s sitting on the sidelines. We have a large group of individuals that are nearing or beyond retirement age who really have no reason to get back into the “risk trade.” These people are the baby boomers. If you had ¼ or more of your retirement wiped out by the recession, but still have just about enough or enough to retire on, would you get back in the stock market? I feel many probably wouldn’t. Many are probably collecting the income and working for an extra year or two to make up for some of the losses. At this point, why take the risk, right?

Another ill effect of the baby boomers being forced to retire late is that it stunts the natural turnover of the job market. New college graduates and those in transition cannot take the positions of retired persons because the people eligible to retire just aren’t doing it. So, in theory, all this money that’s “sitting on the sidelines” may not and in my opinion probably will not get back into equities like they were until we get a new turn over in employment.

On Friday we had a pinpointed news event come out. Goldman Sachs, one company, was being investigated for fraud. This news event about one company caused a market wide sell off. How much fear has to be in a market for that to happen?

Technically we ran into and will continue to run into resistance levels on the S&P if we can get higher than 1200. The pattern lately has been drifting higher on light volume and the reason the markets are able to do that is because there really was no major resistance levels made on the way down. Back in the end of 07 and beginning of 08 there were many places where the price action just dropped off a cliff, which isn’t effective at making strong resistance levels. Just below 1200 was one of those cliff drops. Above 1200 we have plenty of resistance.

I have been and still am a strong advocate for the double dip theory, or multiple dips and these are just a few reasons why prudence remains mandatory in this market environment. The FED can keep the money flowing all they want, but until REAL jobs are created and new money is invested into this market I will remain bearish in sentiment and only take trades on the way up. Keep a keen eye out on Monday for some follow through. The S&P left a pretty strong sell setup on Friday the 18th of April.

Thanks for Reading,

Brad Schultz
CMS
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