what a spin!

I tell you, the Fed, the government, the media and even market buyers are all in alignment to produce positive spin from almost any news, be it bad or good.

Today a much worse than expected preliminary GDP release for Q1 2009 got heavy coverage before the markets opened, countering the dismal number. And they continued hammering all day.

Here’s the bad news – Q1 GDP was pretty much equal to Q4 GDP (-6.1% compared to Q4 GDP of -6.3%). For all intents and purposes things are just as bad right now as they were when the hardest period of the bear market jumped all over the markets in October and November, last year. After all, this new GDP number is only two tenths of a percent better than the absolutely horrible Q4 GDP.

To really make it sink home, the facts are that these two quarters of back to back violent declines represent the worst contraction in over 50 years!

While the -6.1% decline was much worse than the expected -4.7% contraction, the spin was that it was actually better than last quarter, which came in at -6.3%. Can you believe this? And that was the positive spin today – two record declines back to back have never been seen in recent history and with this one slightly less painful than last quarter, we must surely be at a bottom.

Let’s all celebrate the end of this beast! And so the buying took off early and continued all day long.

I apologize in advance for being a cynic, but could it be possible that with today being the 100-day celebration of the new Obama administration that marching orders were out to hold off selling and to do enough buying to make sure a bummer day in the stock market doesn’t spoil tonight’s big celebration?

From what I hear, there will be a party tonight and our president will be speaking in prime time TV about all the impressive 100-day achievements that have occurred – and I am sure the applause-o-meter has been well oiled.

It was all about “hope” today, but let’s be realistic about today’s horrible number and not be taken in by this spin. This makes for three consecutive quarters of contraction, a feat that hasn’t occurred in 34 years.

And just because the flow of blood out of the sick patient is slowing by two tenths of a percent it doesn’t follow in my mind that there is still enough blood in the patient to make a full recovery.

Here are some more facts (from Briefing.com):

The business data in GDP were terrible. Investment in software and equipment fell at a 33.8% annual rate. Nonresidential construction spending (offices) fell at an amazing 44.2% annual rate. Both of these categories will continue lower. Businesses remain in retrenchment mode even if the rate of decline might slow.

Residential construction spending continued to plunge, and was down at a 38.0% annual rate.

These numbers are breathtaking, folks. Here is what it looks like on a chart:

Anyone with a lick of sense knows that while the coming quarters may not be as whopping as the last two quarters, we are going to see continued contraction. Sure, the blood flow will slow down. After all, the patient only has so many pints to lose. The blood flow has to be “STOPPED”, not just slowed down.

I guess those in charge feel that since we have the ability to continuously infuse the patient with new blood, that it is ok if the patient stays on his back indefinitely – to heck with quality of life.

I will now diverge from being such a negative @#$# and admit that such a dramatic collapse in two consecutive quarters may indeed represent a capitulation point. But this bear market is unlike any this country has seen and the recovery is not going to be as smooth as those in charge would like you to believe.

Enough of this positive spin.

I want to talk to you about market divergence. There are a number of indicators that regularly follow the trend of prices. One that I have followed for a number of years is the McClellan Oscillator, which feeds into a related one known as the McClellan Summation Index.

When prices in the stock market move in a direction contrary to a reliable indicator, like the McClellan Oscillator you have what is known as a market divergence. When market divergence shows up it is usually a precursor to a change in trend.

The McClellan Oscillator is a breadth measurement. It measures the number of advances versus the number of declines and then charts the difference between a 19-day moving average of this difference and a 39-day moving average of this difference. Don’t worry about trying to mathematically grasp the concept.

The bottom line is that when the McClellan Oscillator is at relative high values it means that many stocks are participating in an advance. When it is at relatively low values it means that many stocks are participating in a decline.

I like to take a moving average of the McClellan Oscillator line and create a chart. Normally, the direction of stocks prices in the broader market coincides with the direction of the moving averages of the McClellan Oscillator.

Not so right now – and that is why I want you to understand “divergence”. Check out the chart below:

During the last six months prices (the grey candlesticks on the chart) have moved in the same direction as the McClellan Oscillator (the brown line and the red and green moving averages). I have illustrated this by showing stock prices with a zig-zag black line and direction of the McClellan Oscillator with a zig-zag blue line.

In late March of this year, a “divergence” began to appear and is reaching an extreme. I have illustrated this by showing prices with a red-dashed line moving in a completely different direction than the reliable McClellan Oscillator, illustrated with a blue-dashed line. I included a MACD and a Stochastic of the McClellan Oscillator to emphasize the divergence that has appeared.

This is a warning that sooner or later either prices will correct, in line with the direction of the McClellan Oscillator, or the McClellan Oscillator will join in the direction of prices.

For the McClellan Oscillator to join in the direction of prices, it will require that most stocks return to an advancing condition, and that is not the case right now. The fact that the McClellan Oscillator is in a declining pattern is clear evidence that fewer and fewer stocks are doing the heavy lifting. Most stocks have peaked.

This is one of the largest divergences I have seen with this indicator, and it suggests to me that intervention is being earnestly applied, perhaps too strongly.

Because of indicators like this I remain, humbly, defensive – in spite of all the happy buyers that celebrated today.

Enjoy tonight’s party.