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Tuesday, October 6, 2015

Daily updatre 10/6 A Worrying Set Of Signals

We found a few sellers up here today.

Buyers started out early in the day pushing prices a bit higher.  However, sellers showed up and put a cap on things.  SPX did not quite make it up to the resistance line today.  Breadth was slightly positive, but not enough to drive the McClellan oscillator higher.  New highs dropped down to 24.  News lows also dropped a bit down to 15.  The air was a little thin above yesterday's high, but that is not really surprising.  Biotech stocks got clocked and it put a damper on the market. 

The futures did an about face this afternoon.  However, they are still in a micro uptrend at the moment.  The ADX remains very low.  This is yet another weak uptrend so far.  Nothing new about that this year.  At this point the futures probably need to stay above the upper Keltner channel line to keep pushing higher.

We had a pause day today.  The bulls need to keep the pressure on here or the market will roll over.  At this point a roll over carries a significant risk of breaking the Aug. low.  The market is clearly in a precarious position.  Which side steps up to the plate tomorrow?

John Mauldon's outside the box is pretty interesting.  Outside the Box: A Worrying Set Of Signals  I found this chart from Charles Gave worth a look.  Here is his explanation of it to start with.

Since the end of last year I have been worried about an “unexpected” slowdown, or even recession, in the world’s developed economies (see Towards An OECD Recession In 2015). In order to monitor the situation on a daily basis, I built a new indicator of US economic activity which contains 17 components ranging from lumber prices and high-yield bond spreads to the inventory-to-sales ratio. It was necessary to construct such an indicator because six years of extreme monetary policy in the US (and other developed markets) has stripped “traditional” cyclical economic data of any real meaning (see Gauging The Chances Of A US Recession).

Understanding this diffusion index is straightforward. When the reading is positive, investors have little to worry about and should treat “dips” as a buying opportunity. When the reading is negative a US recession is a possibility. Should the reading fall below – 5 then it is time to get worried – on each occasion since 1981 that the indicator recorded such a level a US recession followed in fairly short order. At this point, my advice would generally be to buy the defensive team with a focus on long-dated US bonds as a hedge. This is certainly not a time to buy equities on dips.

Today my indicator reads – 5 which points to a contraction in the US, and more generally the OECD. Such an outcome contrasts sharply with official US GDP data, which remains fairly strong. Pierre explored this discrepancy in yesterday’s Daily (see A Worrying Set Of Signals), so my point today is to offer specific portfolio construction advice in the event of a developed market contraction. My assumption in this note is simply that the US economy continues to slow. Hence, the aim is to outline an “anti-fragile” portfolio which will resist whatever brickbats are hurled at it.

Here is the chart.

That is 35 years of data and no false warnings.  I think this is better then any other economic indicator I have seen.  I have been saying we need to be vigilant in regards to a recession for several months now.  It looks like that worry is justified.  I hesitated whether to show this or not because it is not publicly available.  Only by the goodness of the author will we ever see this again.  However, I have read a few things from Charles Gave before and I believe he is a rather astute individual and worth paying attention to.  The labor market may be in the early stages of rolling over as we have had quite a few layoff announcements lately.  A recession might not be far off. 


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.