Germany’s Weak GDP Adds to Global Uncertainty

Bad news from Germany this morning. Europe’s one economic bright spot reported lower than expected GDP growth for the second quarter. This shouldn’t be too big of a surprise, though, because we’ve known that Europe has been struggling with debt, and austerity measures are causing big slowdowns in the afflicted countries. Greece, for instance, saw its economy shrink 6.9% in the latest quarter.

On the upside, industrial production expanded more than expected. The 0.9% gain was the biggest jump this year and the first increase since March. This is related to the earthquake/tsunami that Japan suffered earlier in the year. That natural disaster disrupted auto manufacturing. The industrial production number was also helped along by an increase in consumer spending.

Economists have been predicting (hoping?) that growth will accelerate in the second half of the year. And this manufacturing data, along with consumer spending, is the first bit of good economic news we’ve seen in a while.

Given the relatively low valuations, we could see a good rally this fall. Of course, we must keep an eye on earnings estimates. Today’s low valuations would not be so low if analysts change their earnings expectations.

I want to share with a few thoughts from Jason Cimpl:

"…in the five times the market swayed 4% or more on four consecutive days, it went on to rally by nearly 30% over the next year three times, while it increased 7% and declined 12% once each. In light of those facts, there is every reason to believe that over the long term the bullish trend is well intact.

At the same time, I think the bears made a statement by ripping apart 1250 support with ease, and I don’t think the bulls will take it back any time soon.

With that said, the bulls defended 1115 this past week, and based on Tuesday’s rebound, significant buying activity took place near 1100.

I think volatility will remain very high over the next two months as the market figures out what to do next. And I think we need to be prepared for more occasions where the market rallies 5% in a day, only to see that gain quickly erased in the following sessions.

In the near term, let’s watch price action near 1197 and 1250 closely. I do not think that buyers will regain 1250, and we should be looking to close longs, or initiate shorts in that area. Additionally, I think the door is open for the bears to break our long term support zone and move the market all the way down to 1050. Let’s watch price action near 1115 and 1100 to see if buyers can continue to support those levels."

President Obama recently announced that he will unveil a jobs package this September. That is another potentially bullish catalyst.

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