2017: American Graffiti Meets Oliver Frankenstein

January 14, 2017

Mish's Daily

By Mish Schneider


Mercury Montclair 1956 (Parked in Santa Fe)

This Mercury first appeared as a concept show car in 1954. In 1956, the Montclair sold as Mercury’s best.

Featured in many movies such as “American Graffiti,” “Bullitt,” “The Lord’s of Flatbush,” “Highway Patrol” and “Frankenstein’s Daughter,” this car represented quintessential American innovation and design.

Interestingly, 2 years after production of the Montclair, The Recession of 1958 occurred. Although a relatively short-lived recession, the major factor in the GDP decline was that new car sales took a sharp dive.

Auto sales fell 31% in 1957. Housing construction slowed due to higher interest rates in 1955 and 1956. By 1957, new house construction had fallen precipitously.

Furthermore, there was a gradual decrease in incoming business of capital goods industries, which resulted in the ending of an expansive boom.

Currently, we may not have a showy Montclair as our symbol of American innovation and design. However, we do have rising innovative technology such as Amazon, Netflix and Facebook all while global and certain domestic economic concerns remain palpable.

Last week, the stock market held up largely due to the surge in NASDAQ and the FANG stocks.

If showy technology could not prompt the Granddad of the four indices, The Russell 2000, to new highs, are we possibly looking at a version of 1958 all over again?

In 1958, there was an apparent paradox as consumer prices rose while production, employment and the price of raw materials declined. Atypical of recessions.

In 2017, we do see signs of growing production with Durable Goods approaching 2007-2008 levels. We also have seen a strong period of declining unemployment.  Nevertheless, the price of raw materials also steadily grows.

Is inflation on the horizon? Is recession on the horizon?

Seems premature to make either prediction. Yet I do advise investors to watch for signs of either slower growth and/or higher commodity prices in the not-so-distant future.

Lucky for us traders, we have technical indicators to follow that will give us the earliest possible head’s up.

For starters, we have the Modern Family. If the Russell 2000 continues to lag NASDAQ or worse, widens the performance gap, one caveat not to ignore.

If Granny Retail fails last week’s lows, I would take note.

If Biotechnology cannot hold recent gains, another reason to exercise caution.

Perhaps the most telling sector of the Modern Family will be Transportation. Right now, IYT, although not as robust looking as NASDAQ, does at least look a bit better than the Russell’s.

Should that change and IYT slips below the 50 daily moving average, beware.

As of the close this Tuesday, we will have the completion of the January 6-month Calendar Range. That will give traders a reliable trading range to work from with calculable risk and reward parameters.

Layered with the Modern Family, the calendar ranges will help ascertain the market’s next direction long before we have economic stats available.

One last noteworthy tidbit as we look back at history. In 1958, the Federal Reserve lowered the discount rate to 1.75% to stimulate the economy. It worked.

Last week, the discount rate was 1.25% up from 1.00% just a month ago. How low can the Federal Reserve go?

An allegory:

In Frankenstein’s Daughter, Oliver Frankenstein (Victor’s Grandson), sets out each night in his Mercury Montclair to collect body parts from dead people to construct a female monster.

With the goal of recreating life, Oliver deals a horrible fate to any who dare to stand in his way.

In 2017, we hear many promises of creating a much greater economy from its dead parts. What price will we have to pay for that creation?

S&P 500 (SPY) 226.00 pivotal support, then 224.50 and above 228.34 the high.

Russell 2000 (IWM) 135.50-136 pivotal support.  Over 138 better

Dow (DIA) 200 to clear 197.50 should hold now if good.

Nasdaq (QQQ) Made new 2017 and all-time highs. 121.50 support

KRE (Regional Banks) 55.70 pivotal, 56.50 point to clear and 54.25 support that should hold

SMH (Semiconductors) 72.35 level pivotal support. 74.00 resistance to clear.

IYT (Transportation) Support 163.75. 168 resistance

IBB (Biotechnology) 274.50 support to hold. 286 Resistance

XRT (Retail) Marginally held the 200 weekly moving average at 43.76

IYR (Real Estate) If this breaks a trendline around 75.75 that would not be good

GLD (Gold Trust) With the confirmed phase change to Recovery, I am leaning more bullish. Must hold 112.25 and clear 115

SLV (Silver) Unconfirmed Recovery Phase. Must clear/close over 16.00

GDX (Gold Miners): Sideways action last week-range 22-23 to break

USO (US Oil Fund) 12.00 is big resistance and 10.80 big support

TAN (Solar Energy) Unconfirmed phase change to Recovery-needs a second close over the 50 DMA

TLT (iShares 20+ Year Treasuries) 120.00 support although now it has 119.50 channel support to defend on the monthly charts

UUP (Dollar Bull) Holding the 50 DMA

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