GDP Revision Non-Event as U.S. Equity Markets Are Mixed

If the Dow Jones Industrial Average gets into the 16850-17400 range I would be looking to short the exchange traded funds which mirror the U.S. equity markets. I would also look to sell any stocks, mutual funds, and/or exchange traded funds one may own if the Dow Jones Industrial Average rallies into this range as I believe the gaps below will get filled. The exchange traded funds which mirror the U.S. equity markets include DIA (mirrors Dow Jones Industrial Average), QQQ (mirrors NASDAQ Composite), SPY (mirrors S&P 500), and IWM (mirrors Russell-2000).

The U.S. equity markets are almost to a significant overbought condition on the weekly charts. If the S&P 500 futures close above the 2010 level on the weekly chart I will then get a buy signal on the U.S. equity markets. I do not expect to get this buy signal as I believe the U.S. equity markets will push back down if they get to a significant overbought condition.

As I stated there are now four gaps below on the daily chart for the exchange traded fund SPY. SPY was down 0.45 (0.23%) today, closing at 195.09. These gaps go down to the 182.86 level, equivalent to the 15,500 level on the Dow Jones Industrial Average. I believe these gaps will get filled sometime in the next 10-12 weeks. I expect to see new lows for 2016 once these gaps are filled. If the Dow Jones Industrial Average pushes down to this level I expect it to continue pushing down and make new lows for 2016. On January 20th the Dow Jones Industrial Average traded down to the low for 2016 of 15450.56.

At 8:30am the second estimate for fourth-quarter GDP was released, coming in better than expected at 1.0%. The first estimate of fourth-quarter GDP released on January 29th came in at 0.7%. Many people are calling for a recession in 2016. The last time the U.S. went into a recession was the Great Recession, lasting from December 2007 to June 2009. The International Monetary Fund has lowered GDP expectations worldwide as we begin to see signs of contraction across the globe. The U.S. receives 2.2 trillion dollars in tax revenue while spending 3.8 trillion dollars each year. This is a yearly increase in the deficit of 1.6 trillion dollars. Sooner or later this excess spending will have to come to an end and the U.S. will be forced to start practicing fiscal responsibility. I do not expect a recession in 2016, however I do expect a recession sometime in mid to late 2017. We are seeing warning signs of a recession with many of the big U.S. retailers closing stores and reports that Sports Authority will soon file bankruptcy.

At 10:00am the core PCE price index for January, the Federal Reserve’s favorite inflation reading, showed a year over year change of 1.7%. The PCE price index for December, released on February 1st, showed a year over year change of 1.4%.

The Dow Jones Industrial Average closed down 57.32 (0.34%) at 16,639.97, the NASDAQ Composite closed up 8.27 (0.18%) at 4,590.47, the S&P 500 closed down 3.65 (0.19%) at 1,948.05, and the Russell-2000 closed up 5.61 (0.54%) at 1,037.18.

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Crude Oil

I am currently on the sidelines in crude oil.

There is a significant amount of overhead resistance in crude oil. I am waiting for a significant move in crude oil before I would look to take a position in crude oil and the oil stocks. On a significant move up I would be looking to short crude oil and oil stocks and on a significant move down I would be looking to buy crude oil and oil stocks with the expectation that OPEC would then cut production by 5-10%, pushing crude oil prices back up.

Crude oil traded up to a high of 34.69 today before closing down 0.24 (0.73%) at 32.84.

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Gold

If gold gets into the 1,175-1,190 range I would be looking to buy gold and the gold stocks. The gold stocks I am looking at include NEM (Newmont Mining), ABX (Barrick Gold), GLD (Gold ETF), KGC (Kinross Gold), and AUY (Yamana Gold).

Following the release of the GDP number at 8:30am gold sold off sharply, trading down to a low of 1212.00. I am starting to see a buy divergence between gold and the gold stocks. When gold was down over $20 today the gold stocks were not down much.

Gold was down 10.90 (0.88%) today, closing at 1222.80.

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