U.S. Bear market rally may be over

In a survey of 2,000 U.S. CEO's, the respondents stated they are less confident today in their company's future than at any time in the past three years.

The problem they say is their inability to control rapidly growing costs, or to pass it through to customers. They also say that, at an acceptable price, it has become very difficult to recruit the staff they need to meet future needs.

Today the U.S. Productivity and Cost data shows that Unit Labor Cost (ULC) points toward an annual increase in labor cost well above +4.0 pct, whereas the annual productivity increase has fallen to well below +2.0 pct.

This indicator of inflation is not good news to those bond traders who, through the Labor Day weekend had figured inflation was dead. Not!

U.S. bonds have been zooming recently, but if you look at the broad equity index charts lately, you'll see that as and when the bond market heads north or south, so too do equities. So, a falling bond market will not auger well for equities.

A reader of my blog sent me a letter this morning that I think speaks to the point I made in my weekend report, which is that the U.S. equity market has been experiencing a bear market rally, which is a good time for traders to be selling into strength.

The reader stated: "A curious development is that while nearly 80% of components are above their 50-day averages, less than 40% are above their 200-day. This is an unusually wide spread - over the past decade, only three times have we seen a similar thing - those being early May 2001, mid-August 2002 and late October 2002. All of those, of course, were classic bear-market rallies. Hmmm..."

I think it's time to watch the stocks that have rising short-term prices (say prices that are above their 50-day MA's) that cannot break out above the higher, but falling, 200-day (40-week) MA's.

The best technical evidence I observe today, from Moving Average and Relative Strength Index indicators, is that the Bear market rally may be over.

The rally was fuelled by falling bond yields (rising bond prices) that were in turn caused by bond traders who were, at the time, happy with the inflation picture, and not unhappy with the corporate earnings picture.

Now the focus will return to continuing inflation (ie, rising wholesale costs), and slowing economic growth (ie, inability to pass prices through to consumers). That means that the rate of growth of corporate earnings will decline. The earnings may even decline in absolute terms.

Some refer to that as Stagflation. We last saw it in the latter part of the 1970's, and that was a time when stock and bond prices suffered, and precious metal prices zoomed.

Yes, I think it's a good time for bullish traders to start to consider the bear case. The Bear that I say started on May 10 may have returned this week.