Personal consumption expenditures are growing, although only at a 2% rate from last year. Retail sales are up substantially, but must be adjusted for government incentives which have been successful in causing a bulge in current spending, likely at the expense of future consumption. Worryingly, consumer confidence remains low, which is a reflection of weak income growth, high structural unemployment and excessive household debt levels. This is a grim picture particularly if income growth remains anaemic. It is important to keep in mind that the wealthiest 20% of Americans are responsible for 65% of consumption, and that their buying power is more closely correlated with stock market performance than with income. Recent stock market gains have given this source of consumption a boost, while the lower-middle class has had to be more frugal. However, asset?driven spending is a two?way street. A sharp break in the stock market and further weakness in housing prices could cause household spending to dry up again. Below, we present some charts that highlight the unbalanced and artificial nature of the recovery.

David Fuller's view This is an important point. A significant break in the US stock market would inevitably hit US consumption hard. Currently, we still have a firm US stock market. But for how long?

Currently, the S&P 500 Index (weekly & daily) remains above its rising 200-day moving average so the cyclical bull trend is still intact. However, volatility such as we have seen recently is often an indication of top formation development. Nevertheless it would be premature to conclude that US equities were in trouble on the basis of some choppy activity which is at least partially related to Europe's sovereign debt problems.

A retest, let alone break of last week's reaction low would be another matter. Meanwhile, US monetary policy remains highly accommodative. We can expect some near-term technical resistance from last month's peak centred on 1200.