GREAT GOOGAMOOGA (2)

 

Back in December, I posted a piece entitled “Great Googamooga”, in which I attempted to clear up some of the confusion the news media generates by focusing on a statistic that appears to show an impending recession, when in fact this particular statistic has had a very mixed record as a leading economic indicator. I contrasted these “Misleading Economic Indicators” like the Small Business Optimism Index with more reliable ones such as Real Yields. Here are a few more contrasting indicators.

In the past few months, some commentators have pointed to weakness in the ISM Purchasing Managers Index as a harbinger of bad things to come in the overall economy. In fact, this index is widely misunderstood:

     This [the ISM Manufacturing Index] is a highly overrated index. It is merely a survey of purchasing managers. It is a diffusion index, which means that it reflects the number of people saying conditions are better compared to the number saying conditions are worse. It does not weight for size of the firm, or for the degree of better/worse. It can therefore underestimate conditions if there is a great deal of strength in a few firms. The data have thus not been either a good forecasting tool or a good read on current conditions during this business cycle. It must be recognized that the index is not hard data of any kind, but simply a survey that provides broad indications of trends (Briefing.com)

This index, like so many others, is notorious for false positives.

GG2

Source: Calculated Risk

A number below 50 indicates contraction. As you can see, since 1963, there have been 10 instances (yellow arrows) where the ISM PMI dipped below 50 but no recession followed. In addition, (orange arrows) there were 2 instances where manufacturing was expanding just as the economy was rolling over into a downturn. This is flip-a-coin prognostication.*

In contrast, though Initial Weekly Unemployment Claims (4 week moving average) have given a number of false positives, since 1971 we have never had a recession unless claims have been moving up for at least 6 months. At the moment, Unemployment Claims are still trending lower.

GG!

Source: Calculated Risk

The chart below, New York Stock Exchange Bullish Percent, has nothing to do with the economy, but it does have a pretty good track record calling major market bottoms over the past 20 years, flashing a buy signal near turning points during the Asian Contagion, the Tech Crash and the Financial Crisis. A move below the green line is a buy signal, and right now it’s flashing green. (A full explanation of how Dorsey Wright creates this is in the footnotes.** )

gg3

*Green arrows represent S&P 500 highs.

** “The bullish percent is a measure of the percent of stocks in any universe that are on a Point & Figure buy signal. This percentage is plotted on a grid from 0% to 100%. X’s represent that more stocks are going on buy signals and the offensive team is on the field for that market or sector. O’s represent that more stocks are going on sell signals and the defensive team is on the field for that market or sector. The two lines of demarcation on a bullish percent chart are 30% and 70%. The 30% level and below is the “Green Zone” or low risk area. The 70% level and above is the “Red Zone” or high risk area. Focus on your field position and column for an assessment of risk in that particular market. Bullish percents are a measure of risk in the market, not the direction an index should move.”  Dorsey Wright

*** Graphs are sourced from calculatedriskblog.com

The information contained in this report does not purport to be a complete description of the markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Don Harrison  and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and or members.

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Recent Market Volatility

Last Friday, as the Dow Jones Industrial Average hovered around minus 400 points for the day, I started working on a piece regarding the recent market volatility and the widespread perception that China, oil and a misguided Federal Reserve are leading us into a bear market and a recession. I had just gotten started when the following video from Brian Wesbury, Chief Economist at First Trust., arrived in my In Box. Brian not only addresses these issues, but makes some comparisons that I had not considered to the Penn Square Bank failure and the Japanese and Latin American troubles in the 1980’s.

Bottom line: Brian sees this as a buying opportunity.

 

http://www.ftportfolios.com/Commentary/EconomicResearch/2016/1/15/this-is-a-buying-opportunity

 Don Harrison

The information contained in this report does not purport to be a complete description of the markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Don Harrison and Brian Wesbury and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and or members.

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GREAT GOOGAMOOGA

Oh, great googamooga, can’t you hear me talking to you

Just a ball of confusion

Oh yeah, that’s what the world is today.

The Temptations, Ball of Confusion

 

I used this immortal 1970 Temptations’ lyric in an investment missive a number of years ago (probably 20, but I’d rather not dwell on that), but classics never get stale, and it certainly applies to the markets today.

Turn on CNBC, scan the headlines on Real Clear Markets, or, in keeping with our retro theme, get your fingers dirty with a print copy of The Wall St. Journal, and what you will find is a gaggle of columnists and talking heads citing the latest statistic purporting to show that we are on the brink of disaster. What is usually lacking with these alarms is any sense of how this stat has actually performed over the years as a leading indicator.

Over the last couple months, I’ve been compiling a list of leading indicators, both those that have worked well in the past as bellwethers, and those that seem to offer guidance, but when you dig a little deeper, provide nothing but confusion.

For example, the “Small Business Optimism Index” is probably what Norman Whitfield and Barret Strong had in mind when they wrote Ball of Confusion. Though it has certainly been trending down before each of the last 3 recessions, by my calculations it accurately predicted 8 of those 3 downturns; that is, it gave a number of false positives. (The green arrows are stock market tops, and the yellow ones are these false positives. Shaded areas are recessions.) In the current bull market, if you had followed the emotions of small business owners, you would have quit the market in 2011 and 2012. In spite of this, you will frequently hear pundits refer to small business sentiment when trying to divine the market’s future.

Small Business

The chart below has, at least in the past, been a much more reliable indicator. Commonly referred to as “The Fed Index”, it is a measure of the restrictiveness of the Federal Reserve.   “Real Fed Funds” is the difference between inflation and the Fed Funds Rate, and the “1-10 Slope” is the difference between the yield on 10 yr. and 1 yr. Treasury Securities. Though it gave 2 slightly false positives (being early before the 1970 and 2000 recessions), most importantly, in the last 50 years, we have never had a recession when these indicators look like they do now.

real yield

For many years, one of the best “contrary” indicators of the stock market’s direction has been the actions of foreign buyers. When they are selling U.S. Equities, it’s a good time to be buying. In the last 30 years, there have been 13 instances where foreigners were very pessimistic about the U.S. outlook, and each time, the U.S. stock market was higher a year later. Today, selling pressure from overseas is as high as it has ever been.

Six 2

In the coming weeks, I’ll have more on these types of indicators.

The information contained in this report does not purport to be a complete description of the markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Don Harrison and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice

 

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