Signup for our free newsletter:

Make Wall Street's Next Failure Pay for Your Summer Vacation

Written By Brian Hicks

Posted June 29, 2011

Don’t let the weasels kid you, friends: Americans are plumb out of spending money.

Our pay checks? Stretched so thin you can see through them. Bank accounts? So empty you can hear the echoes. Moths are fluttering out of our wallets, and there’s nothing but a couple of Canadian pennies and some lint left in our pockets.

Those last two quarters of “economic recovery” have pretty much wiped us out. Another quarter of the same and you can put a fork in us, ’cause we’re done.

That’s the bad news.

The good news is — as always savvy traders willing to hold their noses can always find a way bring in major coin off this sort of situation.

Another Crock

For a year or so, the herd bit big time on the Washington/Wall Street “Axis of Weasels” pipe dream of better times right around the corner… if we would only drop a dime on a new car, or maybe a wide screen TV.

But now that turns out to be yet another crock of government-sponsored horse poop.

Just last week, we heard the Fed tell us things are actually worse than they figured. Apparently, what little GDP growth we were seeing is now tailing off in lockstep with the wind-down of Washington’s QE2 printing binge.

Unemployment is right back up into the plus 9% range. And for those who are lucky enough to be working, American paychecks are back on a downward slope.

Could it be that it was the whole damn recovery was a mirage — an illusion bought and paid for by the poor, abused citizens of these United States?

Oh you bet. Just ask any empty American wallet…

The Big Slide

We are currently spending at the weakest pace in almost two years. The bean counters at the Commerce Department have declared May a wash at best, and more likely a slip into the negative.

US GROWTH TAKES A DIVEclick image to enlarge

And they have retroactively rounded April’s dead flat consumer growth back down into the negative as well.

Just yesterday, several of the Axis of Weasels’ sock-puppet economists weighed in with a fresh round of cheers and chants:

“Some of the headwinds that caused us to slow are turning into tail winds”… “It just has to get better from here (’cause it can’t get worse)”… “Here’s to a better third”… yadda, yadda, yadda.

Unfortunately, the facts don’t bear out the cheerleaders’ misguided optimism any more now than they did a month, quarter, or year ago.

Our first peek at the June figures is already somewhat ugly, with the Conference Board’s Consumer Confidence Index continuing its steep decline. We already saw confidence lose six points from April to May.

Now, the early June reading has bucked the cheering squad’s prediction of a rise and dropped again — from May’s reading of 61.7 to a seven-month low of 58.5 in June. (To give you a sense of scale, 90 is supposed to indicate that we are all fat and happy. 58.5? Not so much!)

The Catch

Even the Axis cheering can’t quite seem to properly lipstick this pig.

The Conference Board’s poll revealed it’s the lousy job picture that’s weighing so heavily on the herd’s mind. In order for the job situation to perk up, the economy has to average 5% growth.

Heck, it takes 3% growth just hold even at a dismal 9%+. But the latest economists’ poll out of the Associated Press has total growth for 2011 slated to come in at 2.3%, and that, my friends, just won’t cut the mustard.

Set Up to Fail

Keep in mind that in the years since we shipped all our manufacturing jobs to Mexico, China, and Vietnam, consumer spending has come to represent 70% of U.S. economic activity. So it’s pretty much buy or die these days.

And American retail is dying.

Unfortunately for a couple million investors, retail stock prices have yet to discount the depth or breadth of this looming disaster. Instead, shares are still riding high on the Axis of Weasels (yes, I really love that phrase!) smoke and promises.

However, the early technical signs of the pending breakdown are already coming into view.

The Walking Dead

When we look to the chart of Standard & Poor’s Discretionary Consumer Stock ETF (NYSE: XLY), we can see that Washington/Wall Street’s promises of endless government-funded profits did indeed manage to drive price back to 2007 highs.

But there it ran into one hell of a brick wall, and is now forming one of the most intuitive — and most dangerous — technical signs: a double top at the top of trend.

XLY Double TopEconomists will argue ’til the cows come home as to whether or not this is the beginning of a long-term bear market or just the “short-term bump in the road” fantasy the weasels are trying to sell us. Fortunately, even this sort of grinding bull-or-bear decision process can still yield substantial short-term gains.

After a defeat like this, the herd just has to know what kind of foundation it has — a gut check before it can begin to build again.

This requires a probing downside move to test the following support nodes:

•    Fibonacci (F.) -23.6% at XLY $36.01 (traditionally weak)
•    F. -38.2% at XLY $33.12 (a bounce here would be very bullish)
•    F. -50% at XLY $30.59 (often a sine wave center point)
•    F. -61.8% at XLY $28.28 (the line in the sand before a complete collapse)

A drop to support at the weak F-23.6% node at $36.01 would still generate a 9.45% loss that could easily power the XLY September 40 put option (XLY1117U40) from its current trading price of $1.70 to as high as $3.89 for gains in the vicinity of 129%.

Take care,

adam english sig

Adam English
Editor, Outsider Club

follow basic @AdamEnglishOC on Twitter

Adam’s editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor’s page

*Follow Outsider Club on Facebook and Twitter.