ECRI Recession Watch: Growth Index Is Off Its Interim Low
by Chart School - November 4th, 2011 9:51 pm
Courtesy of Doug Short.
The Weekly Leading Index (WLI) growth indicator of the Economic Cycle Research Institute (ECRI) posted -9.4 in its latest reading, data through October 28, off its interim low of -10.1 set over the previous two weeks. (Note: last week’s original level of -10.0 was revised downward to -10.1.)
Background
On September 30th, the ECRI publicly announced that the U.S. is tipping into a recession, a call the Institute had announced to its private clients on September 21st. Here is an excerpt from the announcement:
Early last week, ECRI notified clients that the U.S. economy is indeed tipping into a new recession. And there’s nothing that policy makers can do to head it off.
ECRI’s recession call isn’t based on just one or two leading indexes, but on dozens of specialized leading indexes, including the U.S. Long Leading Index, which was the first to turn down — before the Arab Spring and Japanese earthquake — to be followed by downturns in the Weekly Leading Index and other shorter-leading indexes. In fact, the most reliable forward-looking indicators are now collectively behaving as they did on the cusp of full-blown recessions, not “soft landings.” (Read the report here.)
For a close look at this movement of this index in recent months, here’s a snapshot of the data since 2000.
Now let’s step back and examine the complete series available to the public, which dates from 1967. The ECRI WLI growth metric has had a respectable record for forecasting recessions and rebounds therefrom. The next chart shows the correlation between the WLI, GDP and recessions.
…
Facebook
Twitter
LinkedIn 
del.icio.us
DiggS&P 500 Snapshot: Down for the Day and the Week
by Chart School - November 4th, 2011 9:51 pm
Courtesy of Doug Short.
The S&P 500 broke its string of four-consecutive weekly gains with loss of 0.63% for the day and 2.48% for the week.
The index is back in the red year-to-date, down 0.35% and 8.09% below the interim high of April 29.
From an intermediate perspective, the index is 85.2% above the March 2009 closing low and 19.9% below the nominal all-time high of October 2007.
Below are two charts of the index, with and without the 50 and 200-day moving averages.
For a better sense of how these declines figure into a larger historical context, here’s a long-term view of secular bull and bear markets in the S&P Composite since 1871.
For a bit of international flavor, here’s a chart series that includes an overlay of the S&P 500, the Dow Crash of 1929 and Great Depression, and the so-called L-shaped “recovery” of the Nikkei 225. I update these weekly.
These charts are not intended as a forecast but rather as a way to study the current market in relation to historic market cycles.
Weekly Unemployment Claims Drop Below 400K
by Chart School - November 3rd, 2011 9:51 pm
Courtesy of Doug Short.
The Unemployment Insurance Weekly Claims Report was released this morning for last week. Today’s 397,000 number takes us below the 400K level, where it had been for 27 of the last 30 weeks. The less volatile and closely watched four-week moving average comes in at 404,500 and has been above 400K for 28 consecutive weeks. Here is the official statement from the Department of Labor:
In the week ending October 29, the advance figure for seasonally adjusted initial claims was 397,000, a decrease of 9,000 from the previous week’s revised figure of 406,000. The 4-week moving average was 404,500, a decrease of 2,000 from the previous week’s revised average of 406,500.
The advance seasonally adjusted insured unemployment rate was 2.9 percent for the week ending October 22, unchanged from the prior week’s unrevised rate.
The advance number for seasonally adjusted insured unemployment during the week ending October 22 was 3,683,000, a decrease of 15,000 from the preceding week’s revised level of 3,698,000. The 4-week moving average was 3,703,250, a decrease of 10,500 from the preceding week’s revised average of 3,713,750.
Today’s seasonally adjusted number came in below the Briefing.com consensus estimate of 401K and Briefing.com’s own forecast of 400K.
As we can see, there’s a good bit of volatility in this indicator, which is why the 4-week moving average (shown in the callouts) is a more useful number than the weekly data.
Occasionally I see articles critical of seasonal adjustment, especially when the non-adjusted number better suits the author’s bias. But a comparison of these two charts clearly shows extreme volatility of the non-adjusted data, and the 4-week MA gives an indication of the recurring pattern of seasonal change in the second chart (note, for example, those regular January spikes).
Because of the extreme volatility of the non-adjusted weekly data, a 52-week moving average gives a better sense of the long-term trends.
The Bureau of Labor Statistics provides an overview on seasonal adjustment here (scroll down about half way down). For more specific insight into the adjustment method, check out the BLS Seasonal Adjustment Files and Documentation.
For a broader view of unemployment, see the latest update in my monthly series Unemployment and the Market Since 1948.
Measuring the Performance of the Ivy Portfolio
by Chart School - November 3rd, 2011 9:51 pm
Courtesy of Doug Short.
I’ve been posting a monthly moving average update for the five ETFs in featured in Mebane Faber and Eric Richardson’s Ivy Portfolio since the spring of 2009, when I featured my review of the book.
In addition to the monthly updates, last year I made a couple of generic studies of momentum investing with moving averages.
● Learning from the S&P 500 Monthly MAs
● Learning from the Nikkei Monthly MAs
Investing strategies are not the primary focus of my website, and I don’t personally track the performance of the Ivy Portfolio other than to highlight the monthly signals. For ETF performance tracking and backtesting, I use ETFReplay.com, an excellent website for analyzing the performance of individual ETFs and ETF portfolios based on customized moving-average strategies. There are many free tools on ETFReplay.com. However performance backtesting of portfolios does require a paid subscription.
The image below illustrates my research on the Ivy Portfolio since 2007. If you click the image, you’ll open a HUGE version that also shows the monthly performance over the complete range as compared to SPY (SPDR S&P 500 Index). For cash, I’ve used SHY (Barclays Low Duration Treasury (2-yr).
Now, the portfolio in this illustration doesn’t *exactly* match the Ivy five. I picked 2007 as my starting point to show the performance from before the market peak in the Fall of that year. Thus I was forced to make one substitution for the Ivy ETFs — EFA (iShares MSCI EAFE Index Fund) in place of VEU (Vanguard FTSE All-World ex-US ETF), which was launched in early 2007 and didn’t produce a 10-month signal until December of that year. But the substitution presumably understates the all-Vanguard IVY portfolio: I make this assumption because VEU monthly outperformed EFA from the March 2009 monthly close to the latest sell signal (64.9% versus 54.1%).
For anyone interested in researching momentum investing with ETFs, the ETFReplay.com website is an outstanding resource, one that I’m pleased to include in my dshort Favorites.
ISM Non-Manufacturing Index – Not Adding Up
by Chart School - November 3rd, 2011 9:51 pm
Courtesy of Doug Short.
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
“Things that make you go … hmmm” as the line from Saturday Night Live goes, which really fits in nicely with today’s ISM Non-Manufacturing release. The index declined to 52.9 in October from 53 in September, which is the lowest level for the index since July. However, there is something questionable going on here. Let’s take a look at the readings from the 3rd quarter of this year: July 52.7, August 53.3 and September 53.0. There’s the problem. This is the non-manufacturing index that is a reading of the consumer. The behavior of this index brings into real question that massive jump in 3rd quarter GDP at 2.5% from 1.3%, which is a 92% increase, a jump that is largely attributable on the resurgence of personal consumption expenditures that we discussed.
However, if consumers were out spending like “drunken sailors”, why didn’t it show up in the non-manufacturing index? It should have, but it didn’t. Furthermore, one of the areas that should have seen large increases would be “new orders”. That didn’t happen either. New orders slowed to 52.4 from September’s 56.5, which is lower than they were in August during the supposed spending boom. Backlog orders moved to a monthly contraction at a sub-50 reading of 47.0, which means that suppliers are working through backlogs as new orders dry up. This doesn’t bode well for employment in the months ahead if this trend doesn’t reverse.
Furthermore, our ISM Composite Index, a weighted average of both the Manufacturing and Non-Manufacturing Indexes, is at levels seen just before the last recession. Most concerning is the angle of descent in the composite index, which has fallen sharply since the beginning of this year. While the market has gained some traction in recent weeks, it is also worth noting that there is a high correlation between the ISM Composite Index and the market itself. This is not surprising since the composite index is a function of the very things that drive consumers and businesses and ultimately their profitability.
With consumer confidence at some of the lowest levels on record, both current and future expectations,…
Forecasting the Market: A Thought Experiment Revisited
by Chart School - November 2nd, 2011 9:51 pm
Courtesy of Doug Short.
At the beginning of November with 50% of Q3 earnings reported, here is the latest update of my ongoing “thought experiment” for forecasting the S&P 500 price based on earnings fundamentals.
The chart below is based on the latest trailing twelve-month earnings (TTM) data published on the Standard & Poor’s website as of October 25. The numbers are from the spreadsheet maintained by senior analyst Howard Silverblatt. See dshort’s monthly valuation update for instructions on downloading the spreadsheet.
Here are the key assumptions in the calculations:
- The 10-year average of nominal TTM earnings is 50.41 at the end of 2010, rising to 53.65 by the end of the year.
- The average nominal cyclical P/E10 is currently 18.10.
- The S&P 500 historic prices used in the calculations are monthly averages of daily closes.
- Standard & Poor’s estimates of TTM earnings for Q3 2011 through Q2 2012 are
$87.64, $88.32, $90.01, and $90.98 (as of the October 25 spreadsheet).- The months between the quarterly earnings estimates are linear interpolations.
The blue line represents Standard & Poor’s TTM forecast earnings by month multiplied by the historical nominal 10-year P/E ratio. At 2011 year-end earnings of 88.32 and an average nominal P/E of 18.10, we would see the S&P 500 at 1599. At this level, the nominal P/E10 would be 29.99, and the index would be 64.6% above a hypothetical price multiple of the extrapolated 10-year earnings average.
The red line represents a hypothetical S&P 500 price that is a multiple of the average nominal P/E10 of 18.10 and the 10-year average earnings of 50.41 for December 2010. The monthly index price estimates thereafter are linear extrapolations based on average 10-year earnings growth.
The optimistic view (blue line) would put us around 1599 in the S&P 500 by December, the assumptions being that the Standard & Poor’s earnings forecasts are correct the nominal P/E10 ratio is the multiple we see.
The pessimistic view (red line) is a reversion to the historic earnings and nominal P/E10 multiple.
But history shows us that, regardless of your preferred earnings divisor…
Wilshire 5000 Rally Stops on a Dime
by Chart School - November 2nd, 2011 9:51 pm
Courtesy of Doug Short.
Advisor Perspectives welcomes guest contributions. The analysis and recommendations presented here do not necessarily represent those of Advisor Perspectives.
The Wilshire 5000 has created one of the better patterns to follow over the past six months. A clear/clean Head & Shoulders pattern took place over the summer, and then the breakdown started as this broad market index fell over 17% in eight days. The decline took this index down to key support twice in August and September.
The October rally in equities took this broad market index up to its Fibonacci 61% retracement level and to the underside of its neckline.
Should the market action over the last couple of days come as a total surprise? Not really. Until the neckline is broken on the upside, rallies should continue to be viewed as counter trend.
(c) Kimble Charting Solutions
blog.kimblechartingsolutions.com
Market Indicators: Increased Overvaluation After the October Rally
by Chart School - November 2nd, 2011 9:51 pm
Courtesy of Doug Short.
Here is a summary of the four market valuation indicators I updated yesterday:
● The Crestmont Research P/E Ratio (more)
● The cyclical P/E ratio using the trailing
10-year earnings as the divisor (more)
● The Q Ratio, which is the total price of the
market divided by its replacement cost (more)
● The relationship of the S&P Composite to
a regression trendline (more)
To facilitate comparisons, I’ve adjusted the two P/E ratios and Q Ratio to their arithmetic means and the inflation-adjusted S&P Composite to its exponential regression. Thus the percentages on the vertical axis show the over/undervaluation as a percent above mean value, which I’m using as a surrogate for fair value. Based on the latest S&P 500 monthly data, the market is overvalued somewhere in the range of 22% to 42%, depending on the indicator.
Given the 10.77% monthly gain in the S&P 500 in October, it should come as no surprise that all of the indicators are showing increased overvaluation from last month’s numbers. However, as I pointed out in my separate Q commentary, the Flow of Funds data on which the Q Ratio based is increasingly stale. The new Flow of Funds report will be released on December 8th, at which time I’ll post a Q update.
I’ve plotted the S&P regression data as an area chart type rather than a line to make the comparisons a bit easier to read. It also reinforces the difference between the line charts — which are simple ratios — and the regression series, which measures the distance from an exponential regression on a log chart.
The chart below differs from the one above in that the two valuation ratios (P/E and Q) are adjusted to their geometric mean rather than their arithmetic mean (which is what most people think of as the “average”). The geometric mean weights the central tendency of a series of numbers, thus calling attention to outliers. In my view, the first chart does a satisfactory job of illustrating these four approaches to market valuation, but I’ve included…
Made in America … By Machines
by Chart School - November 2nd, 2011 9:51 pm
Courtesy of Doug Short.
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
With the U.S. economy stuck in neutral, new job growth has been anemic. Over the past twelve months through September, non-farm payrolls (non-seasonally adjusted) grew by 122,000 positions per month. Average monthly private payroll growth at 149,000 jobs is just marginally better. So, with Election Day 2012 looming, no Washington politician, Democrat or Republican, will be without his own plan to fire up job creation.
President Obama’s American Jobs Act, sent to Capitol Hill on September 12th, is in keeping with the longstanding Washington tradition of proposing temporary expedients to deeply rooted structural issues. In the case of manufacturing employment, it is our opinion, the President’s proposed legislation, even if enacted in its entirety, will do little or nothing by itself to increase the number of jobs on the factory floor.
There are many reasons why manufacturing employment has fallen from a peak of 19.7 Million jobs in 1979 to 11.8 Million today. Those range from managerial incompetence to a revolution in transportation. Lower nominal wages abroad only partially explain the shift. Low wages reflect lower productivity. Versus eighteen other developed and newly industrialized nations (such as Korea or Taiwan), the U.S. ranks high in terms of manufacturing productivity.
Expanding manufacturing employment in the U.S. requires eliminating disincentives built into the tax code and in our entitlement programs. The two make labor more relatively expensive to capital (in the form of automation or labor saving investments). Since 1979, net capital investment (the cumulative sum of gross capital investment less depreciation) by the private sector has averaged 6.8 percent per annum. In contrast, total spending on wages and salaries by the private sector since 1979 has averaged 5.4 percent per annum.
Capital investment has been spurred by accelerated depreciation methods. By lowering a business’ effective tax rate, these make capital investments at the margin more attractive. On the other side of the equation, a steady increase in FICA (Federal Insurance Contribution Act) rates and income ceilings have made labor progressively more expensive. Rising health care costs have aggravated the problem.
In 1978, the average manufacturing employee’s wage was 72 percent of the FICA income max. One year later, the ratio fell to 60…
What’s Stability Got to Do With It?
by Chart School - November 2nd, 2011 9:51 pm
Courtesy of Doug Short.
The Unofficial Report Card for Ben Bernanke’s “Price Stability” Goal
Given the recent historical run in the equity markets for October, questions arise that relate to a historical context of stability in markets. Normally measured in volatility and the VIX index, the exercise for today, however, enlists the assistance of measuring “swings” in the market based on day-to-day prices. Notably, we’ll look at swings on three fronts: Intraday, Previous Day Low to Next Day High, and finally Previous Day High to Next Day Low on the S&P 500 Index. The hypothesis is that “stability” should be measured by lower measurements throughout time.
When Ben Bernanke began as Fed Chairman, the words “transparency, stability, and accountability” frequented the roundtable discussions. When one downloads his entire list of testimony available in public records (yes, tedious), readers may enjoy knowing where he places emphasis. Here is a quick table to show his testimonial emphasis items. Obviously, the highlighted items are the official “mandate” for the Federal Reserve. Garner your own decision on what he deems important.
While Bernanke measures stability in subjective areas such as core inflation, readers may enjoy measuring stability in something more tangible, verifiable, and without controversy — S&P 500 Index Prices. Using data readily available at Yahoo Finance coupled with some Excel engineering, a series of charts can be drawn. The first in the series of charts simply shows a scatter graph of the last 15,000+ trading days showing the Intraday Swings as measured by percentage of movement.
Obviously, 15,000 plots on a single graph looks busy, but the addition of a 20 day moving average shows the spikes in both 1987 and the more recent (post 9/11) past. Additionally, the notable spike in the last several years, due to the financial crisis, ramped the frequency of intraday moves well north of 5% and many above 10%.
The following chart starts about the time the Congress enacted the “dual mandate” that included maximum employment terminology. Moving Greenspan and Bernanke’s timelines show how much prices moved intraday throughout each term.
…
German
Spanish
French
Italian
Portuguese
Japanese
Korean
Russian
Chinese
Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(
