Scaling back into Friday's unemployment number

Back on July 19th we highlighted the bearish sentiment readings and said that we expected a near term bounce in the market. We took a 1/3 position in the S&P and Emerging Markets ETFs at that time. Since that time the S&P has rallied approximately 5%. So where do we stand now.

The S&P 500 has traded right up to resistance levels. As we mentioned in the July 19th post the S&P has made a series of lower tops and lower bottoms since the April highs. We are currently close to breaking that downtrend, and would need a close above 1125 on the S&P emini futures contract to break that trend.

S&P 500 Index















Many of our sentiment indicators have returned to neutral levels as opposed to the bullish levels reached in mid-July. The AAII (American Assoc of Individual Investors) bull/bear ratio, the ISE sentiment indicator, and the Rydex funds beta chase indicators are all back to neutral territory as shown below.



AAI BULL/BEAR RATIO

ISE SENTIMENT INDEX



















RYDEX FUND BETA CHASE




















Now let's turn to the fundamental and macro economic side. The macro economic numbers continue to come in weak. Also, the ten year treasury bond traded down to 2.95% this week. This is the lowest yield of the year. The bond market is telling us that it does not expect a recovery any time soon in the US economy.


US TEN YEAR TREASURY BOND YIELD

Another sign of economic weakness is coming from the Economic Cycle Research Institute or ECRI. The ECRI has correctly called every recession in the US for the last 45 years. ECRI's most popular indicator is the WLI, or Weekly Leading Indicator. The WLI is closely followed by economists and Wall Street strategist. The WLI is now flashing a warning signal that a double dip recession is coming. ECRI's WLI index - which has a 100% record of calling a recession when it hits negative 10% - is currently sitting at negative 10.7%.

click on image to enlarge

For more on the ERCI click here.

Bottom Line:

With the S&P 500 Index sitting right at resistance, and the economic fundamentals continuing to flash warning signals, we will remove the exposure to equities which we added back in mid-July. Should Friday's unemployment numbers surprise to the upside, we will look to see if the S&P can close above the 1125 resistance area. If so we would look to put some equity risk back into the portfolio. But with a neutral technical backdrop and the continued emergence of downright scary macro economic data we would prefer to err on the side of caution at this time. We continue to worry more about return of capital as opposed to a return on capital.