Why Does Expansion Feel So Much Like Recession?

The technicians will be happy with Monday’s price action in equity markets. The movement of the S&P clearly above the summertime highs will signal to some that the “inverted head and shoulders” on the daily chart – which projects to new equity market highs – has been completed and we are about to take a massive run to the upside.

I am less convinced, although the technical damage done to the bearish case by the 1.5% rally is undeniable and I would no longer lean short on a tactical basis. But volumes remained weak (912mm shares, still under 1bln even with a breakout), bonds rallied, and the VIX refused to move to new lows. By the way, the scale of the “inverted head and shoulders” is out of proportion with the length of the move into the formation, so technically it isn’t a reversal pattern at all. However, because the pattern is recognizable by all investors as well as dogs and some species of fish, there will be much ado about this move… especially this near to quarter-end.

The impetus for the rally? It probably was not the sharp widening of credit spreads for Ireland and Portugal. Greek Prime Minister Papandreou said that for Greece to default on its bonds would be a “tragedy” and he promised it would not happen. Didn’t we already move on from that? I hate it when someone promises something that we already took for granted. It makes it seem like we were prematurely taking it for granted, because otherwise he wouldn’t need to promise, right? (Of course, this is tongue-in-cheek. It would be a grievous error to assume that Greece will not default, or that all of the dealers who own piles of Greek bonds and are telling us it’s time to buy them are necessarily giving arm’s-length advice.)

A better candidate for goosing the rally, although it was already well under way at the time, was the announcement by NBER that the recession is over…actually, that it was over in June of last year. That is a curious decision in cycle dating. The Unemployment Rate rose another half-point after last June, and is only back down to 9.6% because of the decennial Census. The U-6 measure, which adds discouraged and marginally attached workers, is still 0.2% higher than in June of 2009 (see chart - click all to enlarge).

Sure, unemployment definitely looks like it's improving. Really?