Here’s How The Rally is Sowing the Seeds of Its Own End

Back on January 22, I pointed out that there was no chart resistance between 2700 and 2800 on the S&P 500. I felt that if the market cleared 2700 it would race to 2800 in the blink of an eye.

We’re almost there.

It has been an amazing rally. The market turned on a dime and has never looked back. To say that it was an unusual bottom is an understatement. But that’s history and this isn’t about post mortems, it’s about figuring out where the market is headed from here.

For now, it still looks higher. Here’s what you should look for.

Economists Can’t Forecast Retail Sales, But You Have an Edge Because You Can

I had to chuckle when I saw how surprised the Wall Street media crowd was by Thursday’s monthly retail sales report for December. The consensus of economists guesses for the month was for a 0.2% increase. Instead, they got smacked with a drop of 1.2% in the seasonally adjusted headline number. How could they have been so wrong?

The funny thing is that if they had been paying attention all these years, they would know that, retail sales track the stock market with a slight lag. No surprise there. Most economic indicators track the direction of the stock market with a slight lag. That’s because the market is one of the primary signaling mechanisms for consumer behavior.

House prices are another, but stock prices are far more visible, particularly to the big spenders who are the ones who move this number around at the margin. They own stocks. When stocks go up, we feel richer and we spend more. When they go down, we pull in our belts. Most people who don’t own stocks are spending to subsist. They typically don’t have much discretionary income so their spending patterns don’t change much. They’re the stable base of retail sales. Stock owners are the swingers who spend more when the market is up, and vice versa.

I guess it boils down to this. The stock market is the economy. So why bother following economic data when the stock market tells us all we need to know? Mainly because the Fed watches both. The Fed cowers when the market declines, and it cowers when economic data shows up with a negative “surprise” that shouldn’t have been a surprise.

Here’s how you can gain an edge by knowing this information

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