Global Economies Still Stalling

The year 2010 is turning out to be dud, unless we see a stronger third quarter and forward guidance. And, while the possibility of a double-dip recession is likely relatively low, there are still concerns with stalling in the global economies. China has shown some stalling with the government there, trying to gingerly rein in some growth in order to avoid an asset bubble and inflation. Any sustained slowing in China would impact other global markets.

China’s GDP is predicted to slow to the high single digits. The country’s GDP is pegged at 9.2% in the third quarter on dwindling stimulus, according to The State Information Center. China could see two straight quarters of declining GDP, albeit the growth is still far ahead of the U.S. and Europe. Pundits estimate GDP growth of eight percent at the end of 2010.

Overseas in Europe, Germany is reporting some positive news and this is important for Europe given that what happens in Germany could help dictate the direction of Europe.

Domestically, the tormented housing sector continues to under duress. New and existing home sales were sub-par. The soft housing data will also continue to impact consumer confidence and spending. Housing company Toll Brothers Inc. (NYSE/TOL) managed to beat on earnings per share and revenues, yet the fact that revenues fell 1.5% year-over-year continues to point to softness in the housing sector. We are still not buyers in housing.

The key Durable Goods Order reading for July showed a decline of 3.8% versus the estimate of a 0.5% increase. The reading indicates continued caution towards spending on big-ticket and non-essential goods, which will impact GDP. Unless consumers spend on non-essential items, the economic recovery will likely continue to be slow.

The bias is negative, as stocks search for a bottom. Until we see this, the downside risk remains high.

The DOW broke below 10,000 to 9,937 last Wednesday, which is a red flag. The S&P 500 also broke a critical support level at 1,040 and the Russell 2000 broke below its key psychological support at 600. While the indices all managed to bounce back above the key levels, the technical breaks are bearish and point to potential additional downside moves. What you what to see is some buying support to surface on declines to or below these levels.

The overall bias at this time is down, as reflected by the current level of the indices below key moving averages and chart tops. The stock indices remain below key technical levels. The key will be the ability of markets to hold as we move forward. I continue to be cautious due to fragile technical picture and global economic growth issues.