Best of the Week
Most Popular
1.Are UK Savings Interest Rates Finally Starting to Rise? Best Cash ISA 2017 - Nadeem_Walayat
2.Inflation Tsunami - Supermarkets, Retail Sector Crisis 2017, EU Suicide and Burning Stocks - Nadeem_Walayat
3.Big Moves in the World Stock Markets - Big Bases - Rambus_Chartology
4.The Next Financial Implosion Is Not Going To Be About The Banks! - Gordon_T_Long
5.Why EU BrExit Single Market Access Hard line is European Union Committing Suicide - Nadeem_Walayat
6.Trump Ramps Up US Military Debt Spending In Preparations for China War - Nadeem_Walayat
7.Watch What Happens When Silver Price Hits $26...  - MoneyMetals
8.Stock Market Fake Risk, Fake Return? Market Crash? - 2nd Mar 17 - Axel_Merk
9.Global Inflation Surges, Central Banks Losing Control and Triggered the Wage Price Spiral? - Nadeem_Walayat
10.Why Gold Will Boom In 2017 - James Burgess
Last 7 days
London Terror Attack Red Herring, Real Issue is Age of Reason vs Religion - 25th Mar 17
Will Washington Risk WW3 to Block an Emerging EU-Russia Superstate - 25th Mar 17
Unaccountable Military Industrial Complex Is Destroying America and the Rest Of The World Too - 25th Mar 17
Silver Mining Stock Fundamentals - 24th Mar 17
A Walk Down the Dark Road of Bad Government - 24th Mar 17
Is Stock Market Flash Crash Postponed Until Monday? - 24th Mar 17
Stock Market Bubble and Gold - 24th Mar 17
Maps Of Past Empires That Can Tell Us About The Future - 24th Mar 17
SNP Independent Scotland's Destiny With Economic Catastrophe, the English Subsidy - IndyRef2 - 24th Mar 17
Stock Market VIX Cycles Set To Explode March/April 2017 – Part II - 23rd Mar 17
Is Now a Good Time to Invest in the US Housing Market? - 23rd Mar 17
The Stock Market Is a Present-Day Version of Pavlov’s Dog - 23rd Mar 17
US Budget - There’s Almost Nothing Left To Cut - 23rd Mar 17
Stock Market Upward Reversal Or Just Quick Rebound Before Another Leg Down? - 23rd Mar 17
Trends to Look Out For as a Modern-day Landlord - 23rd Mar 17
Here’s Why Interstate Health Insurance Won’t Fix Obamacare / Trumpcare - 23rd Mar 17
China’s Biggest Limitations Determine the Future of East Asia - 23rd Mar 17
This is About So Much More Than Trump and Brexit - 23rd Mar 17
Trump Stock Market Rally Over? 20% Bear Drop By Mid Summer? - 22nd Mar 17
Trump Added $3 Trillion in Wealth to Stock Market Participants - 22nd Mar 17
What's Next for the US Dollar, Gold and Stocks? - 22nd Mar 17
MSM Bond Market Full Nonsense Mode as ‘Trump Trades’ Unwind on Schedule - 22nd Mar 17
Peak Gold – Biggest Gold Story Not Being Reported - 22nd Mar 17
Return of Sovereign France, Europe’s Changing Landscape - 22nd Mar 17
Trump Stocks Bull Market Rolling Over? You Were Warned! - 22nd Mar 17
Stock Market Charts That Scream “This Is It” - Here’s What to Do - 22nd Mar 17
Raising the Minimum Wage Is a Jobs Killing Move - 22nd Mar 17
Potential Bottoming Patterns in Gold and Silver Precious Metals Stocks Complex... - 22nd Mar 17
UK Stagflation, Soaring Inflation CPI 2.3%, RPI 3.2%, Real 4.4% - 21st Mar 17
The Demise of the Gold and Silver Bull Run is Greatly Exaggerated - 21st Mar 17
USD Decline Continues, Pull SPX Down as well? - 21st Mar 17
Trump Watershed Budget - 21st Mar 17
How do Client Acquisition Offers Affect Businesses? - 21st Mar 17
Physical Metals Demand Plus Manipulation Suits Will Break Paper Market - 20th Mar 17
Stock Market Uncertainty Following Interest Rate Increase - Will Uptrend Continue? - 20th Mar 17
Precious Metals : Who’s in Charge ? - 20th Mar 17
Stock Market Correction Continues - 20th Mar 17
Why The Status Quo Is Under Increasing Attack By 'Populist People Power' - 20th Mar 17
Why the SNP WILL Destroy Scotland, Exit UK Single Market for EU - IndyRef2 - 19th Mar 17
Crypto Craziness: Bitcoin Plunges on Fork Concerns, Steem Skyrockets and Dash Surges Above $100 - 19th Mar 17
What ‘Ice-Nine’ Means for Your Money - 19th Mar 17
Stock Market 4 Year Cycle - 18th Mar 17
The Only Article You Need to Read to Understand the Trump Phenomenon - 17th Mar 17
Janet Yellen Just Popped the Stock Market Bubble - 17th Mar 17
Financial Crisis, Steve Eisman: Smart, Lucky, Abrasive & Now One Of Them - 17th Mar 17
Gold Cup – Horse Racing’s Greatest Show, Gambling and ‘Going for Gold’ - 17th Mar 17
Trader Education Week - Free Event to Help You Learn to Spot Trading Opportunities - 17th Mar 17
$1.4 Trillion of SPX Notionals Due to Expire - 17th Mar 17
Preserving Order Amid Change in NAFTA, U.S. Sovereignty v. WTO - 17th Mar 17
3 Maps That Explain Why Syria Raqqa Battle Will Drag On - 17th Mar 17

Market Oracle FREE Newsletter

Elliott Wave Trading

U.S. Economy Death Cross - Trouble Coming to Paradise

Stock-Markets / Stocks Bear Market Feb 09, 2013 - 01:29 PM GMT

By: Gordon_T_Long

Stock-Markets

The Macro Indicators are signaling there is potential trouble coming to paradise.

Goldman Sachs points out in a recent study that there is a remarkably strong correlation which has emerged as a result of global central bank policy initiatives. The steely eyed Tyler Durden at Zero Hedge points out:

We have noted the odd cyclicality in macro data (and its leading effect on the market) and it seems Goldman Sachs has also noticed that something is different this time. For 15 years, the seasonal patterns in Goldman's macro index have been mild to totally negligible; but since 2009, something changed.


As the chart below indicates, it really is different this time as the macro cycle has become extremely short and consistent (drop in H1, rise in H2) - and is evident not just top-down but bottom-up in payrolls and ISM for instance. Goldman expounds pages of statistical jiggery-pokery to show what we suspected - that this is not weather or seasonality effects, and is not just US (UK and Europe see same pattern of six month cycles); but appears driven by central-bank policy actions (which have been more concentrated in Q4/Q1). 2013 is playing out exactly as the last three years has - with a downdraft that is set to continue for the next few months - though they note that stability in oil prices this time (and recent expansion of easing efforts - Fed and BoJ) may shift the pattern. For now, it appears the macro cycle is becoming shorter and warrants concern as they are unable to find anything but 'reality' as a driver of this odd cyclical pattern as the real economy fades rapidly after each and every infusion of promises from the Central Banks.

US Macro data is following the same downward path as we have seen for the last three years...

.. each year Q4/Q1 is dominated by fiscal or monetary policy actions to recover from the exposed reality of the underlying economy...

Will this time be any different? Well, we noted the lead-lag relationship here before, and as stocks test new highs with macro data plumbing new depths, we can only imagine which better reflects reality for now.

As Goldman concludes:

Given that we are now in the part of the year that has typically presaged macro weakness, we will be paying close attention to developments in fundamental factors: policy, financial conditions, oil prices, and shocks from the rest of the world and the Euro area.

Put simply, each year central banks lift their foot modestly to see just what is going on in the real world, and each year the reality is not good - which then pushes them back into action; the question is (with BOJ not going open-ended until 2014, OMT off the table for Spain for now, and Fed QE4EVA 90% priced in) when will the central banks come back and with what...

Charts: Goldman Sachs

Separately, we have noticed that each of the REGIONAL Economic Surprise Indices are also ALL following the same pattern GLOBALLY.

DM Economic Surprise Index

The above chart also suggests that economic "reality" is once again not meeting the analysts' growth and market expectations. This has become an annual event.

Death Cross

The ECO pattern is clear. A 'death cross' of the 100 DMA through the 200 DMA is a strong confirming signal that a sustained change in perceptions is now underway.

As JP Morgan's Tom Lee points out, the US Citigroup Economic Surprise Index (below) has moved below zero. On the past 7 occasions when this happened the near-term equity upside was capped. The average maximum upside of 1% and average drawdown of 8% seen over the following 3 months demonstrate the asymmetric risk-reward in our view.

S&P 500 vs US Macro

Chris Puplava at Financial Sense Network has also noted yet another correlation:

.... as you can see in the close up below, the rise in oil prices six months ago suggests we see a peak in economic positive surprises and the stock market in late February to early March. Given we likely have a peak in economic activity and the stock market in 4-6 weeks based on prior oil prices, even if interest rates breakout their run is likely to be short-lived and a plunge in interest rates and rise in real interest rates (if nominal rates fall faster than inflation) may be the catalyst that sees gold stabilize and begin to advance.

We have an endless array of charts showing extreme market levels but three of note are:

  1. Citi's Panic/Euphoria gauge for US stocks (right) has only been more euphoric on two occasions - Q4 2000 & 2008,

  2. Goldman's S&P 500 Positioning which has only been this extremely long-biased on two occasions - Q4 2008 & Q2 2011; and

  3. Barclays' Credit-Equity divergence which has only been this over-bought stocks on two occasions - Q4 2008 & Q2 2012.

The Panic/Euphoria Model

Earnings Decidely Negative

Switching gears we need to consider that fact that so far Q4 2013 earnings have been far worse than most (so far) suspect:

There has been some confusion about the quality of the ongoing Q4 earnings season, which has seen some 47% of the S&P 500 companies report to date (and with 53% still left things can certainly change). The confusion apparently is that this has been a "good" earning season so far. Nothing could be further from the truth, and as Goldman shows in its midterm Q4 earnings report, the reality, not spin, is that earnings are tracking at $24.03, or some 6% below the consensus estimate at the start of earnings season of $25.51. This revised number, which could well drop even more from here, means that Q4 earnings will post a minuscule 1% growth in EPS year over year compared to Q4 of 2011 when Europe was imploding, and when the world's central banks had to arrange a global bailout to prevent yet another Armageddon.

Here are the facts:

  • Using a mix of realized and consensus earnings, 4Q EPS is tracking 6% below the consensus estimate at the start of reporting season, $24.03 vs. $25.51
  • Positive earnings surprises are tracking below average this quarter (34% vs. 42%). The percentage of firms missing earnings estimates by one standard deviation or more is above the 40 quarter average (18% vs. 14%).
  • 36% of firms beat consensus sales expectations by more than one standard deviation, below the 10-year historical average of 38%. In addition, 19% of firms have missed sales estimates by that magnitude (versus 18% historically).

In summary, the S&P 500 is expected to earn some $98 for all of 2012, which means that as of this moment, the market is trading at a quite rich 15+ multiple (although what multiples mean under central planning nobody knows yet). So how does the S&P500 go from 98 in earnings in 2012, to the consensus 111 in S&P500 EPS in 2013? A magic escalator apparently.

Bottom Line - S&P 500

We are now in the early stages of shifting from an extreme condition of complacency. This has been coupled with elevated levels of a potential economic or geo-political shock to the market and OVER OPTIMISTIC INVESTOR SENTIMENT.

Conditions are suggesting we have a RISK-OFF environment looming ahead of us before the Ides of March..

Download your FREE TRIAL copy of the latest TRIGGER$ Checkout the GordonTLong.com YouTube Channel for the latest Macro Analytics from expert Guests

Gordon T Long     Publisher & Editor general@GordonTLong.com     

Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that you are encouraged to confirm the facts on your own before making important investment commitments. © Copyright 2013 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or suggestions you receive from him.

Gordon T Long Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife