Second Quarter GDP Estimated at 2.4%

| July 31, 2010

The Bureau of Economic Analysis reported that their initial estimate of second quarter GDP is 2.4%, a decline from the revised first quarter figure of 3.7%. The final phase of the inventory adjustment process contributed nearly half of the reported growth, with real growth coming in at about 1.3%. Real growth figures over the past two quarters excluding the impact of inventory gains have been 1.1% and 1.3%, respectively. As we have noted on many occasions, this is certainly not the growth trajectory of a strong recovery, and the recent “unexpected” deterioration in economic data, coupled with the confluence of historically reliable recession indicators, suggests that the risk of a double dip remains very high. The stock market itself has been reflecting that risk since the violent correction in early May and the massive topping formation that has been developing since late 2009 remains on the verge of a significant breakdown.

We noted last week that stock market behavior during the next two weeks may provide an important signal with respect to long-term direction. A precipitous decline in the S&P 500 index would be a major bearish signal, indicating that a break to new long-term lows is imminent. On the other hand, if stocks continue to consolidate at current levels or even move higher, the rally from early July will likely extend until the end of August, at which point markets will encounter another telling inflection point.

Chart analysis is focused on interpreting the message of the markets. As Dow theorists, we believe that the price action itself contains the most useful predictive information, so we endeavor to understand what the markets are saying and then position ourselves to agree with them. Charts do not always contain an urgent, compelling message, but when they do it is imperative that you listen. We have come to one of those critical long-term inflection points and it is time to pay close attention.

Category: Commentary, Market Update

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