A downside surprise in GDP

Plus

An upside surprise in Employment Cost Index

Equals

More evidence of STAGFLATION

Headlines on Yahoo Finance this morning:

"Economy Slows Sharply, Inflation Heats Up
AP - The economy's growth slowed sharply in the second quarter, logging just a 2.5 percent pace as consumers tightened their belts and spending on home building dived. Inflation, however, shot up."

But we in the Bill Cara blog community knew that already.

Bill, reading your blogs is like having my own personal crystal ball!! Keep up the great work.

Bulls MAY be able to run this right up to resistance but who wants to hold equities with those numbers? I would not be surprised that we see yesterday morning play out again but selling pressure has diminished this week so it really is up to the bull camp to set the tone.

this is high stakes for both camps. overcoming resistance here would give longs some important ammo.

failure here, however, would be the third failure in a row and would be really negative.

watching transports and not buying the gap up.

Here's your next short candidate IMHO:

http://stockcharts.com/h-sc/ui?s=xly

I think consumers fall right off the map 3Q/4Q. Again, JMHO.

Bulls are trying to save it RIGHT NOW.....

Watching resistance and agree with mtzion that transports important clue.

If you scroll down on Trader Mike site there is an interesting $INDU chart--looks like death cross is in the near future.

Dollar down today. Bill's forecast of a possible big day drop may be in the cards soon.
Retaining cash. Have positions with miners and short dollar plays. Looking at profunds short index ETFs.

XLY looks like it is breaking down out of a long term triangle on the monthly and weekly. looks very shortable.

i'm wondering if a couple of these bigger rail stocks are working on bear flags here. BNI. UNP. with how oversold they've become, they should be roaring up from these levels but they're not.

this rally's not going to stick.

The upshot of all this is that the Fed discount rate is sure to continue higher for the forseeable future. No pause, as inflation needs to be strangled before it gets out of hand.

From David Merkel on RM
7/28/06 10:53 AM EDT

"....As for me, my view of the yield curve at present is somewhat complex. I think we will continue where we are for a few months, as the FOMC holds for a meeting or two, and then see the curve steepen as inflation gains steam, partially due to persistence in the imputed rent calculations. Then the FOMC will come back off of hold and tighten, amid weakness in the economy.

This is a shift in my views, and I have been considering it for a few months...."

FWIW, I find David has keen insights on the bond market and associated macro implications.

i gotta give the longs credit here. they can see DJIA 11250 and SPX 1280 and it looks like they want to take those areas out today. intraday we're getting a little overbought but with the way they are driving the TICK, overbought may not mean much for a couple of days.

it's gonna look like a perfect double bottom on the daily charts.

so how does the market rally on lower than expected GDP and headlines of economic slowdown and inflation heating up?

Bill, when do the new algorithms with the updated GDP numbers take effect - i just don't get it...i'm itching to short some of the recent gainers.

I just shorted an HB that is up over 5% on today's bad economic news. The entire sector is moving along with the market as if a slowing economy and inflation were a good thing. This HB also reported earnings this week, showing drastically lower sales, higher margins and lowered guidance for the forseeable future. Their management was noteworthy in claiming that a pause in Fed hikes would motivate home buyers to re-enter the market. Nonsense, I say.

Agree with mtzion here that this one now looks a little extended. Bulls successfully defended right where I said they were. Cloudy here so WalMart Crystal Ball still workin'. Trading school to open next week. :)

Agree also on that "perfect double bottom". Bulls setting up the "Hey it's 1994 all over again!" scenario. Fed pauses, markets rally and never look back.

Gone for the rest of the day. Bulls have their end of month mark up.

Sergio,
It's just end of month window dressing games.

Mark M,

You said, "Fed pauses, markets rally and never look back."

I respectfully disagree. Looks to me like a classic set-up for a "sell the news" event when the FED actually pauses.

Anyone think Energy might be a short here?

Peculiar that it has been underperforming
as of late - even today.

Or will it be one final spike in energy prices this summer or fall that finally brings down
the US "goldilocks"

There must be a good trade - maybe a long/short combination to play the coming volatility.

Any ideas pros?? (or semi pros)????

glenn-

Read my post. I said the bulls were making a case for a 1994 scenario. That's what happened then after the pause. I never said that was MY view or that that would happen now. I don't want readers here to think I said anything like that.

now you got me remembering 1994. that was a tough year. you look back on a DJIA chart and it just looks like a blip, a few months of consolidation but i remember that being a really tough year to make a buck.

bearishness just seemed to build and build and yet the indices never really collapsed. orange county shock headlines, mexican devaluation. pretty wild.

somebody is really driving the TICK today. are they using up their ammo or are we about to melt up for three or four days?

Mark M,

Read your post again...my sincere apologies...funny how you read things a second time and think, "oh...that's what he meant." Yes, the bulls ARE trying to make a case for the 94 scenario...incorrectly of course, as we all know here.

Gentlemen,

While all the economic conditions point to a major drop as explained here in great length, do you actually believe the market will go crashing before the US elections?

Now the news is that a ceasefire will be negotiated in the Middle East, which is likely to drop oil prices, for a while at least, and push the market even higher. Couldn't they (the "mighty and powerful") actually keep holding the market like this until after the elections? Would they be able to pull that off?

But if the rates don't go up, how will they prevent gold from going up?

Your insights would be much appreciated. November seems a long ways to go still.

Thank you.