The stock market’s bullish trend is broken

Maybe fundamentals matter to stock prices afterall. Following months of dire economic news capped off by the recent 0.5% first quarter GDP, the stock market broke the bullish trend that began with the February low. The Nasdaq Composite is weaker (and its March high is significantly lower) than both the Dow and the S&P 500. The Nasdaq is filled with technology growth companies. In good times, the Nasdaq leads the stock market higher; now it is leading stocks down.

In addition to the very poor 1st quarter GDP: the Dallas Fed Manufacturing Survey reported its activity index for April at -13.9. This was both worse than expectations and a bit worse than March. The March Durable Goods Report showed new orders dropped -2.5% compared to last year. U.S. auto sales have slowed to the lowest amount in thirteen months. The bottom line is that economic activity is weak. But, the Federal Reserve has short-term interest rates already at an extremely low level. So, they are powerless to do anything about the weakness. Underscoring the situation, there is no inflation; there is worldwide deflation that is just beginning to pick up speed. The PCE Price Index (i.e., consumer income and outlays) was only 0.8% in one year. The “real” capital expenditures – non residential fixed investment showed its first decline since the great recession.

My table of relative-strength stock-market sectors shows marked weakness in the Technology Group. Every sector fell substantially outside of the Bio-technology Sector. The large drop in the Retail Sector is also important because so much of our economic strength depends on consumer activity.

Here is the chart of the S&P 500:
sp500

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