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US ECONOMY (January 10th 2013): US Markets for 2013

Comprehensive US market and economic analysis for traders and investors in 2013...

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An explanation of the sort of articles and analysis you can expect from Big Macro Picture.

Big Macro Picture 2011 - Insight into "How We Analyse"

2011 was one hell of a year to be in the markets. Perfect for us to show you what we do. Check out our week by week analysis for 2011, to demonstrate how we view economic and market trends.

Big Macro Picture - 2012 So Far

To get the most out of our daily articles, please check out our week-by-week analysis of 2012 so far. Continuing on directly from the 2011 review, we get you up right up to speed, giving context to the rest of our 2012 analysis up to early June 2012.

Thursday 28 June 2012

PRE-MARKET (June 29th 2012): Resolutions in Europe?

 

PRE-MARKET for US trading on June 29th 2012.
 

We're not really fans of politics here at Big Macro Picture - but we had to admire how the politics headlines affected the US markets on Thursday. First up was the Supreme Court, where President Obama's healthcare act survived in-tact, giving markets enough of a reason to sell off heavily in the morning. At one point the Dow tested the bottom range of our 12450-12467 target, down 175 points. Then, in the last half an hour of trade, markets rallied back to the 12600 mark, apparently on news that Chancellor Merkel had cancelled a press conference to work on a new solution for the European debt crisis.

And this morning, we wake up to news that the EU summit covered more ground than the market expected, and the US futures are indicating another +100 open for the DOW.

We're more focused on data rather than headlines in determining our views, but Thursday showed why it's important to keep perspective using SHORT TERM analysis, in order to avoid being caught up in the emotion of the market. A very pessimistic start to the day would have had us convinced that the market was beginning to further reflect the MEDIUM TERM weakness of the current trend - but by the end of the day, we were more impressed by the market's resilience. Identifying 12450-12467 (and 1310-1315 on S&P) as significant, we knew that the market would have to break this area convincingly to suggest conviction in any bearish move. Similarly, we know that above us on the S&P there is serious resistance between 1336-1345 before the previous swing highs can be tested - it will be interesting to see how today plays out for the US markets.



We can see how the market is fast approaching the Kumo projected in front of it - a test for the downward trend. If by July 10th the market is able to confidently break out beyond 12700, the US indices will cease to be technical shorts on the Daily chart.

While we recognise the resilience in the market - and understand there may be more underlying strength to come in US indices - it doesn't alter our MEDIUM TERM bearish stance (April-present), in the same way it doesn't alter our LONG TERM bullish stance (2009-present).
 
If the outcomes from the EU summit are a boost to European business conditions, when this is reflected in the data and with conviction in market breadth, we will be confident in declaring a new MEDIUM TERM bullish cycle. Until then, it is safe to say that adding long positions into this bullish move might be risky, unless simply hoping to ride short term momentum.

RELEASE OF LEADING ECONOMIC INDICATORS

Today sees the release of 28 global economic indicators for inflation, employment and business activity. Out of these, seven we deem significant enough to factor into our Big Macro Picture view, although only two we consider particularly important, and one is only a revised figure.


The remaining significant leading economic indicator being released today is the Chicago PMI. The US regional surveys can often produce misleading results when used on their own, and can be fairly volatile. However, when used in tandem with other regions and the overall US PMI, we can get a real sense for developing trends in the United States economy.

 
As we can see, the MEDIUM TERM trend from March onwards is clearly down - as we often see in the summer months. The LONG TERM view is still positive (above 50 indicating expansion), but we want to know whether or not the current month-to-month trend is getting better or worse. For our MEDIUM TERM view, a reading higher than last month would show nice divergence from the current trend - while a lower reading, or a reading below 50, would be a real cause for concern.

The Richmond Manufacturing index dipped negative for the first time since November 2011 on Wednesday, and with other leading indicators deteriorating, it will be interesting to see how Chicago PMI holds up. It will certainly prove to be an interesting prelude to the ISM Manufacting PMI released on July 2nd, which we view as the most significant economic indicator for the global economy.




HOW YESTERDAY'S DATA AFFECTS OUR MEDIUM TERM VIEW

Note: If you're new to Big Macro Picture, check out how we look at the markets on different timeframes (LONG, MEDIUM and SHORT) to identify the different trends  that form our Big Macro Picture. Our review of leading economic data tends to help us get a lead on the month-to-month cycles of the market in the MEDIUM TERM category.


Yesterday saw the release of Weekly Unemployment Claims, Austrian PMI and European Retail PMI (one moderately useful and two relatively weak leading indicators, but relevant nontheless), as well as official US and UK GDP figures (both of course, lagging/confirmation indicators).

We view Final GDP figures in our rear-view mirrors as investors - by the time GDP stats are released, the market is already concerned with the next quarter. However, it's always interesting to note how GDP is developing each quarter - the trend, and performance against analyst expectations, can offer us insight into the LONG TERM cycle. With the UK dipping back into recession, and the US growth rate ticking back down to 1.9%, there are a few concerns over the health of that cycle -- although no strong evidence that this bull cycle is about to end. With next quarter in mind, given the detorioration of indicators since Q1, we have good reason to suspect Q2 GDP might continue that MEDIUM TERM downward trend.


Moving on to yesterday's leading indicators:

The US Weekly Jobless Claims number is a helpful indicator for MEDIUM TERM trends when used in the proper way. Firstly, being released every week, the overall trend is a useful barometer for trends in the US economy. The peaks, troughs and trends in the indicator can pick up on MEDIUM TERM soft patches in US economic activity - and in the LONG TERM, the trend clearly indicates whether the economy is in a bullish or bearish cycle.


As we can see above, the LONG TERM 2009-present trend is captured, and within that we can see numerous MEDIUM TERM trends. The latest, troughing at 348k in February/March, continues to trend generally higher compared to earlier this year, within the LONG TERM bullish trend. While we might expect this bearish MEDIUM TERM trend to reverse eventually, until it does, it only adds credence to our bearish thoughts on this timeframe.


With a reading of 386k this week, a bigger concern is that last week's number was revised up to 392k - joint highest reading since last December, with every likihood this week's reading will be revised higher also. No single figure can be taken too seriousy with this indicator - being an employment figure, it is more likely to lag than lead other indicators, and it is prone to producing highly anomalous individual points of data. But as you can see above, it has a useful place in our Big Macro Picture, and we expect the trend to turn positive before we declare a new overall MEDIUM TERM bull cycle.


In other news, two interesting data points were released from Europe, but neither play too significant a part in our analysis. Firstly European Retail PMI is a wild, volatile indicator. It is prone to producing misleading signals and anomalies, but the trend can often be useful to observe in building up our Big Macro Picture. The Italian component improved from a PMI of 35.8 to 41.7, the French component from 41.4 to 48.9 and the German component was 52.4, up from 50.7. The overall result was a Retail PMI of 48.3, up from 43.3. Given the volatile nature of this statistic, we struggle to take it too seriously, but we can at least add it to the few indicators bucking the MEDIUM TERM bearish trend.

Finally, Austrian PMI fell to 50.1 from 50.2, failing to buck the negative trend seen since earlier this year. This indicator is used on balance with the other European PMIs to identify the overall state of the European economy.

On balance, the day's economic news had a net negative effect on our Big Macro Picture MEDIUM TERM view, without giving us anything new to think about. The most significant news of the day, US Weekly Jobless claims, failed to show any signs of a reversing bearish trend - while showing particularly poor revised figures for last week.

US MARKET ANALYSIS (June 28th 2012): The Short, Medium and Long Term

It's worth keeping up to date with, and discussing, how our short, medium and long term views are being affected in real-time.

After rebounding over 7% in June, it was wise to question how valid the supposed MEDIUM TERM bearish stance had become, which we began to initiate from March onwards. In early June (prior to the rebound), we felt the different timeframes suggested the following:


Note: If you're new to Big Macro Picture, check out how we look at the markets on different timeframes (LONG, MEDIUM and SHORT) to identify the different trends  that form our Big Macro Picture. Our review of leading economic data tends to help us get a lead on the month-to-month cycles of the market in the MEDIUM TERM category.


LONG TERM : Bull Phase, beginning March 2009 to present, indicated by expansionary signals in the global economy early/mid 2009, and the corresponding market recovery.

MEDIUM TERM : Bearish, beginning March 2012 to present, indicated by the deterioration of leading economic and market signals.

SHORT TERM : Bearish, indicated on a day to day basis by trend, momentum and Ichimoku technical analysis.


The main questions we began to ask were: Is the long term bull market at risk of coming to an end?  Will our medium term signals start to indicate hidden strength in the global economy/markets?


THE LONG TERM BULL MARKET

 A MEDIUM TERM bearish phase can, at the end of a bull market, turn into a LONG TERM bear market. Since the 2009-present bull market began, summer 2011 and summer 2012 are the only two times when we've questioned the health of the bull market. With a new MEDIUM TERM bearish phase beginning in March and the severity of declines in Europe, we naturally

What do we look for when assessing when a period like summer 2011 is threatening to turn into a new bear market? One of the simplest signs is whether or not we expect the United States, and other powerful economies, to enter a recession. Similarly, by mid-2009 at the end of the last bear market, we were able to identify a new bullish economic cycle forming when we believed US GDP would stop declining.

Presently, Europe and China are issuing signals that we can expect either slowing growth or contractionary conditions in 2012. However, the US economy has so far impressively diverged from the rest of the world in terms of forward-looking GDP expectations. We have no solid reason to believe the US is headed for recession in 2012 - at least, no indication so far. The same conditions prevailed in 2011, after which the US market made new highs in 2012, and avoided both a recession and a new bear market.


The Markit US PMI data in June suggested expansionary conditions should continue, and unless the ISM PMI data suggests otherwise on July 1st (or at any other point this year), we continue to have faith in the LONG TERM bull cycle from 2009-present.


US PMI by Markit - above 50 indicating expansion




THE MEDIUM TERM BEARISH PHASE

The MEDIUM TERM bearish phase, which gradually became apparent from late February onwards, has shown few signs of improvement in June. However, it is vital to monitor how our leading economic and market indicators are faring, as the slightest divergence from market action can provide us with trading opportunites.

The BPNYA market-breadth indicator bottomed along with the market in early June, reflecting a short term bullish move. However, we tend to view the 20 week moving average as a fairly good measure for medium term cycles - and the BPNYA is still some way below that.  While we haven't made a lower low in BPNYA for two weeks, we are mindful of the risks in taking bullish positions within medium term bearish cycles.






Making the case for "green shoots of recovery" within this medium term phase, of course, we can be encouraged if the BPNYA weekly chart holds up. During routine market pullbacks, it is common for the BPNYA to retrace to 40-50 and eventually bottom - there are countless examples of summers when this has been the case (which you can check out on the BPNYA stockcharts link for yourself). It is not impossible that we have experienced a typical medium term pullback and have already bottomed - we're just yet to be wholly convinced.




Let's look at the global economic indicators which are useful in anticipating trends in the market. As usual for simplicity we'll stick to familiar indicators - the Markit PMI surveys and other regional business surveys. On the 21st, we received a new raft of data from the EU, which has so far been the most startling source of economic weakness.


We were provided with fairly mixed news - the majority of new data releases were below expectations, and continuations on the current MEDIUM TERM bearish trend. German Manufacturing and Services PMI both made new trend lows, as did EU Flash Manufacturing PMI. US Markit PMI fell to the lowest since July 2011, while HSBC China PMI fell to its lowest recorded reading.


On balance however, not all data was bad, and after a steep market retracement we always look for any signs of divergence in that trend. The EU Flash Services PMI and French Manufacturing and Services PMIs all beat expectations and rose for the first time since January/February. While we generally don't like to speculate on the causes of data fluctuations, we are aware that a weaker Euro and lower oil prices may serve as an automatic stabiliser for European economies, and will closely watch the data for signs of underlying economic improvement.

Friday 8 June 2012

PRE-MARKET (June 8th 2012): What To Make of the Afternoon Sell-Off



PRE-MARKET for US trading on June 8th 2012.

So, a tale of two markets in yesterday's session - the Dow and S&P rallied towards the previous swing highs in the morning, ahead of Ben Bernanke testifying at 3pm (GMT). Then, barely moving an eyebrow, his wording caused risk assets (gold seemingly included again) to sell off in the afternoon. Is this significant for today's SHORT TERM analysis?
 
Chart courtesy of the excellent StockCharts

The candle formed on the S&P yesterday was particularly bearish, indicative of Wednesday's rally fading and sellers pushing the market to hand back its gains for the day. Our theory from the previous day - and of course, we could still be wrong - was that we were riding on momentum from short-covering, oversold conditions, speculation on the Fed and typical volatility around the 200MA. We still don't know if buyers will come in and help push us higher again - but yesterday's action was not a great sign for bulls.

Our plan for today will be keeping an eye on how the major US indices react when they open. On the downside, 1300 is a pivotal level for the S&P, and below that the 200MA at 1287. On the upside, 1336-1340 will be worth watching, the Daily kijun-sen and Weekly tenkan-sen respectively.

THE DAY AHEAD

Trading in Asia and Europe overnight has continued the downwards momentum from the S&P's afternoon sell-off. There is no really significant data to watch out for, either to move the markets or to affect our MEDIUM TERM market/econimic analysis today. Being the end of the week, we'd watch out for how both Europe and the US closes - depending on today's price action, traders might not want to hold short positions into the weekend, in case we get "good news" out of Europe.


HOW YESTERDAY'S DATA AFFECTS OUR MEDIUM TERM VIEW

Note: If you're new to Big Macro Picture, check out how we look at the markets on different timeframes (LONG, MEDIUM and SHORT) to identify the different trends  that form our Big Macro Picture. Our review of leading economic data tends to help us get a lead on the month-to-month cycles of the market in the MEDIUM TERM category.
 
We believe that on-balance, the data is still pointing to a MEDIUM TERM (month-to-month) bearish phase for forward-looking economic trends, something it has gradually indicated since February 22nd. During these trends, we look at new data every day to judge whether on-balance that argument is strengthening or reversing.
 
As we commented in yesterday's pre-market release, none of the three leading indicators released yesterday are especially influential on our thinking, but they form a part of it nontheless.
 
 
 
Firstly, UK Services PMI - unlike UK Manufacturing PMI, this has put in a good reading this month compared with expectations. We have failed to make a new lower low and this indicator has stabilised since peaking in early February. However - there are no immediate signs of a new bullish trend forming, and the data is overshadowed by the terrible UK Manufacturing PMI data. CONCLUSION: mixed result.

Next up, US Weekly Jobless Claims - a good reading this week considering how bad NFPs were last week. We might look at the chart and say "in the long run the trend is much better than 2011 still". Then we'd say "since February, the trend has been up". And after that, "But we're not making higher highs, we're lower than last week and it's not as bad as April". CONCLUSION: mixed result again. We really would want to see this gradually trending back down for it to contribute to MEDIUM TERM bullish argument, until then, it's quite bearish Feb-onwards on that timescale.

And finally Canadian Ivey PMI. As we've mentioned, this isn't the most stable of indicators, but you can still see it has some value for identifying these cycles. It follows the other indicators that recovered in 2011-2012 but fell back. This reading was a good one - we've beaten expectations and improved on the previous month, despite not being out of that downward trend. CONCLUSION: yet another mixed result, but this one is leaning towards being slightly more bullish. A new trend could be forming on this indicator - but for now, the overall trend is still down.
 
 
Overall the net effect is a very slight improvement on that MEDIUM TERM scale - but admittedly from indicators less influential to our views. The majority of leading indicators are still clearly in a bearish MEDIUM TERM trend - but we're always looking for signs of this reversing, especially from any indicators in Europe, the heart of the current concerns. While we have no interest in predicting what could cause that trend to be halted, significantly lower oil/raw material costs and a more appropriately priced Europe may start to act an automatic stabiliser before people expect. We wait for any signs of this in the data.
 
There are no new indicators released today that we're interested in at Big Macro Picture - so we wish you a profitable day and an enjoyable weekend.

Thursday 7 June 2012

PRE-MARKET (June 7th 2012): New Cycle or Sucker's Rally?



PRE-MARKET for US trading on June 7th 2012.

The big question being asked by investors since last night: What was with that rally?

At Big Macro Picture, we're always interested in SHORT TERM analysis of market levels to see where we stand within a MEDIUM TERM cycle. Gradually from late February onwards, we saw increasing concern voiced by leading market and economic indicators, effectively leading us into a new month-to-month bearish phase. So how does yesterday's rally fit into that?

Here's our first thought: The 200 Day Moving Average on US indices tends to put up a fight when the market tries to break through for the first time. After closing below it earlier this week, it's perhaps little surprise to see volatility around those levels (1284 on S&P, 12271 on DJIA). Our first immediate pit-stop on the Dow was 12323-12350, noting the resistance above it at 12400.

However, closing at 12414 at the highs of the day, that resistance seemed to be brushed aside. Does the sheer strength of yesterday's market indicate a strong rejection of the 200MA? Was there anything more to it than technical reasons (Art Cashin suggested a reverse head and shoulders formation coming out from heavily oversold levels)?


Charts as usual from the excellent StockCharts.com




From what we can gather, the rally was also justified by: Big Ben Testifying Today and by extension, A Lot of Short Covering. I think it's fair to say that resistance around the 200MA, the short-term oversold market conditions, and then the worries (followed by panic) of weak short positions closing out, all conspired to drive the market higher. Not to mention, inevitably, both Momentum Traders and other Investors "Panic Buying-Back Their Stocks" in some cases, helping the Dow close up 286 points.


So is this a Sucker's (or Short Covering) Rally? Or is the market pre-empting a recovery in economic conditions, and a new MEDIUM TERM bullish phase into the summer? Unfortunately, the answer is a bit of a cop out - we can't say for sure how far this momentum will take us, or if the leading economic indicators will point to better conditions and justify any rally retrospectively.


However - from the perspective of our MEDIUM TERM analysis, apart from market technicals and the prospect of Big Ben giving the market's a significant confidence boost, we simply stick to our assumption that we are still in a MEDIUM TERM (month-to-month) bearish phase within a 2009-present LONG TERM bull market. There is no change in our view of economic or market conditions from yesterday - and we still await any signs of those indicators bottoming out.

Being agile and objective - ie we are not permanent doom-mongers or permanent market optimists - it will take more than the market action on June 6th to convince us that a new cycle is underway. You'll be the first to hear it if we change that MEDIUM TERM view, right here on Big Macro Picture.

THE DAY AHEAD

Trading in Europe this morning has continued Wednesday's momentum overnight. In terms of our SHORT TERM analysis of market levels, we're interested in how the US indices react as the market opens. So far, futures are indicated to open higher - we're looking at 12490-12530 above us on the Dow to see where how momentum fares. Beyond that, 12600-12686 would prove pivotal, especially around the previous swing high of 12611 if we eventually got that far. Below us, 12350-12323 remains significant, and we might expect the 200MA at 12271 to act as a magnet for the Dow in the event of a sell-off.


Ben Bernanke testifies this afternoon - we expect some degree of volatile, unpredictable market movements as traders speculate on the likelihood of more QE. We're cautious of making any decisions in and around that time period - but in terms of our MEDIUM TERM analysis, our views will not change based on the wording of Bernanke's speech at 3pm (GMT).


While we also will be watching for weekly US Unemployment claims at 1.30pm (GMT), we don't expect the market to react too strongly unless we have a significantly unexpected number.


RELEASE OF LEADING ECONOMIC INDICATORS

Today is fairly quiet for our leading economic indicators. We will review these on the site at the end of trading today, but none of the three releases are especially important to us at the moment in terms of our cyclical economic analysis.

 

UK Services PMI - released earlier this morning, unchanged but better than expected. Far stronger than UK Manufacturing data but seemingly has still peaked for the time being, with no signs of a new trend forming.

US Weekly Unemployment Claims - released in a few moments time, bulls will want to see a much lower number than last week. We're more interested in the overall trend than any individual number, which has been gradually worse since February.

Canadian Ivey PMI - released at 3pm (GMT), this is not the most useful month-to-month indicator, but a continuation of the trend in April and May would only add to argument for bearish MEDIUM TERM cycle. Bulls will want a significantly better number than last month to indicate some stabilisation.

Wednesday 6 June 2012

Big Macro Picture 2012 - Up to the Present Day



This article is designed to continue on from our previous post (Big Macro Picture 2011), just to get us up to speed before we start posting about the present day. To avoid repeating ourselves, it's worth checking out to see how we view markets on different timeframes, and categorise our analysis ("SHORT TERM", "MEDIUM TERM", and "LONG TERM", which come together to form the Big Macro Picture).

We'll cover the start of 2012 up until the round of data released on June 2nd. Hopefully it will continue to shed light on how we analyse market and economic trends, and give us some context for when we begin regularly posting.

 

BACKGROUND

The start of 2012. The S&P is around 1257 (where it started 2011). The Dow at 12217. The FTSE at 5572. The bull cycle is almost 3 years old, having begun in March 2009, the bottom of the bear market at the peak of the financial crisis.

Once again a Santa Claus rally has pushed the market higher - and in the opening days of 2012, here is how everything looks:




Our three independent categories of analysis line up as follows in January 2012:


LONG TERM - our year-to-year analysis, designed to identify bull and bear markets/economies, such as 2000-2002, 2003-2007, 2008-2009, 2009-present. Unchanged since mid-2009, when it became clear that a new bull cycle was beginning, the global economy and markets were recovering.


MEDIUM TERM - our month to month analysis, designed to identify trends lasting several months, such as March-October and October-January in our previous 2011 post. This indicator changes gradually over time, as leading market and economic indicators give us more clues to economic trends - something we aim to analyse at Big Macro Picture. This form of analysis slowly started to show positive signs from October to December 2011, where it continued in the early days of 2012.


SHORT TERM - designed to give us a guide as to important market levels and trends, using technical and market analysis. The outlook given by this type of analysis can change from day to day or week to week - but most importantly, is a guide to give us context rather than instructions of what to buy or sell.






JANUARY - FEBRUARY 2012

Our MEDIUM TERM analysis for 2012 begins as a continuation of the trend from late 2011 - a recovery in the leading economic and market indicators, after a particularly severe correction in the summer. On the graph above showing global PMI data, we can see that the latest data point for early January 2012 confirms the positive trend. The troughing and then recovery of these indicators marks reasons to be bullish in terms of the month-to-month cycle we're in.


The market's optimism is demonstrated by the BPNYA chart above. We are above the 20 week moving average which is pointing upwards, and we are yet to enter "overly optimistic" (overbought above 70+) levels, having troughed in October.


Looking at the chart for confirmation using SHORT TERM analysis, we can see on the S&P that we are above the Ichimoku Cloud and above the upwards-pointing Tenken-sen and Kijun-sen (check out Youtube for explanations on Ichimoku chart analysis - it's very helpful for identifying market trends and important levels). We have seemingly beaten the 200MA and need to make an attempt on the previous swing high (1292). Overall, we have several reasons to believe we are in the middle of a MEDIUM TERM bull cycle within an overall LONG TERM bull market - giving us reason to have above-average exposure to risk assets.


We still approach our analysis in a cautionary way - attempting to "time the market" might not be impossible, but it is still prone to errors of judgment and timing. When our MEDIUM TERM signals start to indicate something, "scaling in" tentatively while we wait for gradual confirmation is often our wisest option, instead of boldly buying large quantities of shares in January 2009 or October 2011.

As January continues into February, the trend in leading indicators continues. This is how our indicators look after the February round of data (please note that at Big Macro Picture, we consider over 100 independent economic signals each month, and that this brief article only illustrates our points using a handful of them).






We can see that across numerous economies, the bullish month-to-month trend beginning in late 2011 has continued to post new "higher highs" as part of that trend in early February. The most resilient economy appears to be the United States - the least resilient, still indicating contractionary conditions despite improvement, appears to be the Eurozone. Having the choice of any major market at our disposal, at Big Macro Picture, at this stage we'd be looking to add exposure to US indices rather than Europe - while protecting against currency risks, suspecting the dollar might weaken in a risk-on environment.


Regardless, we are at least encouraged that the centre of global economic concern - Europe - shows signs of reversing the trends that threw equities markets into sharp declines in mid-2011.


This leads us up to the first major inflection point of the year in terms of Big Macro Picture's MEDIUM TERM economic analysis.




FEBRUARY 22ND

By late February the S&P had gained around 8% for 2012, with the FTSE at around 6% and the DAX up 13% (having rebounded strongly from a 15% loss in 2011). In the weaker European markets, the Italian MIB was up 9% (having lost 26% in 2011) and the Spanish IBEX was flat (after a 13% 2011 loss). While we can see the effects of a "flight to junk" associated with a bounce-back from severe declines, we still prefer to invest in the economies we deem stronger and more likely to outperform over time, in this case the US S&P.


The chart for the S&P along with the BPNYA are shown below for 2012 up until late February.



We can see that the market volatility of late 2011 has been replaced with a typically assured bullish channel in 2012. The BPNYA indicator remains above its 20 week moving average which is still pointing upwards. However, with the indicator now above 75, we note the risk that the majority of the move may be over. So long as the indicator has not peaked or fallen below 70 however, we know that the market could still continue higher for some time - and the indicator remains very bullish.


We reach February 22nd 2012 - when we receive our first cautionary signals from the leading economic indicators in 2012.


Several PMI figures were released for the Eurozone, and a great many of them fell beneath analyst expectations. French Services PMI, German Services PMI and German Manufacturing PMI all posted lower than expected figures, all lower than the previous month, failing to make new highs in their current trend. Japan Manufacturing PMI, Australian Manufacturing PMI, HSBC China PMI and then US ISM Manufacturing PMI then joined these indicators in failing to make new higher highs over the next week.

Please note that a great many other leading economic indicators continued to post higher highs at the same time - simply that the clarity of the late 2011-onwards cycle was becoming cloudier. This combined with the relatively overbought conditions on the bullish percentage charts, the eerily-low levels of volatility market by a low VIX and increasing concerns over rising petrol prices affecting confidence (political tensions in the middle east). From this point onwards, we begin issuing caution relating to adding more market exposure, and look for cheap ways to protect portfolios from downside or future volatility.




MARCH - APRIL 2012

Whenever we start to see divergence between leading economic indicators and market sentiment, we start to pay more attention to our SHORT TERM analysis, as a guide for market momentum. We may become "less bullish" in terms of new positions added or increasing the % of portfolio in equities, but at this stage, the divergence is a suspicion rather than a sell signal. We still aim to have risk-on exposure to the strongest markets (in this case the US indices), but we're mindful of the cycle losing momentum, and don't wish chase greed-driven markets higher.


As we enter March then, we are scrutinising the other leading market and economic indicators for either confirmation or rejection of this "losing momentum" argument. It's worth pointing out that we do this entirely objectively - at Big Macro Picture we don't go looking for indicators to back up any particular story, we want an on-balance argument for and against the idea, to make the most effective investment decisions. We're especially interested in data surrounding the Eurozone, given this was the source of the weak data on February 22nd, and the centre of the weakness in 2011.


For purposes of brevity, we move on to the next round of data from March 22nd - the follow-up data from the previous month which began our more cautionary stance. Here is how the S&P and the bullish percentage indicator looked by late March.



We can see that the S&P isn't reflecting any of our concerns from late February, now up 7.5% for 2012. This isn't unusual - our indicators are designed to give us cautionary leads before a market has stopped making new trend highs - although this isn't always possible. While we are still happy to enjoy long exposure, we are mindful of the increasing risks of market over-optimism.


The March 22nd data confirms our cautionary stance - French Manufacturing PMI fell lower than expected back to contractionary levels, French Services PMI was worse than expected and failed to make a new trend high. German Manufacturing PMI fell into contractionary territory and made a new lower low on a seemingly new downward trend. The overall Eurozone Manufacturing PMI figure, still indicating contraction from 2011, also ticked lower than February.


This helps confirm our cautionary stance - that a new month-to-month MEDIUM TERM trend is forming, with Europe at the core of the worries. As in the previous year, this is compared with a relatively strong US economy - which by April shows no sign of following this new trend.






These periods in the market can often be the most difficult for us - where the market diverges from our indicators. There is no guarantee the indicators will not return to market-positive before the market itself reacts to the supposedly weakening conditions. Similarly, the timing of any expected decline can take days, weeks, or even months. At this stage, we still cannot have absolute conviction behind this new proposed cycle forming - and know that while market confidence is high, we shouldn't stand in its way. We continue to focus our long exposure to the most resilient market - the US, while potentially balancing this exposure with short exposure to certain parts of Europe.


We will be honest, these market periods can be difficult and dangerous - while we might take one course of action, it would be fair to say that simply "reducing market exposure" would be appropriate as well.


Gradually, as you can see, from February 22nd to the end of April, we have increasing reasons to be worried about the market - despite being positioned to enjoy the Dow and S&P making new highs.






LATE APRIL - MAY 2012

The slow transition from bullishness at the start of 2012 to MEDIUM TERM bearishness was confirmed between late April and early May 2012. A combination of market over-optimism and divergence from leading economic indicators gave us cause for concern - but only by May could we say the market was beginning to reflect that divergence. Here is the BPNYA weekly chart from late April, along with both the S&P and Euro Stoxx 50:


Firstly we can see that the US indices have outperformed Europe considerably by late April, and hedging long US positions with bearish European ones has proven satisfactory up to late April. The BPNYA chart, and the evidence of momentum loss on the S&P chart (first neutral close of 2012 in April, MACD divergence), give us more reasons to be convinced of a new bearish MEDIUM TERM market cycle forming - in spite of the US economy holding relatively firm.

The leading economic indicators by late April/early May saw the ISM US Manufacturing PMI make a new trend high -  but the data at the source of our concerns for global equity markets, the core European economy, worsened once again to make new trend lows.

By this point, we have enough evidence to scale portfolios to be net short - or if we were long-only investors, we'd strongly consider exiting the market - with confirmation if the US indices (strongest markets) became technical shorts and broke the strong support at 1340. It simply would depend on the investor or trader in how they approached the markets at this point - more aggressive traders might have entered shorts as early as March. By mid-May, the BPNYA indicator and S&P look like this:



We can see it doesn't take long to get confirmation from the SHORT TERM analysis that the S&P has entered bearish territory. Note how early on in the cycle we got our first cautionary signals from the European economy, which went on to be the main drag on the markets in mid-2012. Attempting to go against the market in late February, which is also when the BPNYA peaks, proves reckless and impatient. The advantage of leading indicators is to get a head-start on the market, we must always be careful to be neither too early or too aggressive in how we use our analysis.


We are now very fast approaching the present day in our review of 2012 so far. We will finally summarise how the handful of indicators we've used for this exercise - covering 2011 and half of 2012 - look right in the present. Then, once we've completely given context to our overall Big Macro Picture analysis, we can start regular analysis via articles on this site, showing the various other leading indicators we like to use.




THE PRESENT DAY (JUNE 6TH 2012)

The S&P is at 1285, up around 2% for 2012. The Eurostoxx 50 is flat for 2012, while the CAC and FTSE are down around 5.5% and the Italian MIB is down 15%.


In our review starting January 2011 to June 2012, we have used a sample of leading indicators to illustrate how we view MEDIUM TERM trends and cycles in the markets. Here is how they look in the present day:








As we can see, the market has declined by over 8% on the S&P alone since our first signals to be "net short" in our portfolios, although the results differ depending how "convinced" we needed to be of the new trend forming. We had approximately 8 weeks warning prior to this to prepare for the possibility, showing how useful it can be to use MEDIUM TERM analysis of leading indicators while managing our portfolios.


As we bring our analysis up to the present day, we can see that the trends in the current cycle have continued. Conditions have worsened on the majority of our leading economic indicators, with the trend originating from and most pronounced in the Eurozone. The knock-on effect of this, and the presumably independent weakness in data from China, has now been reflected in market anxiety in both strong (US) and weak (European) stock markets.


We reach an interesting - and difficult - point in the cycle where the S&P has retraced to its 200 day moving average. This may act as a magnet in the short term, with expected volatility around it, making it difficult to advocate fresh positions until the market clearly bounces or falls through this level. We might expect the market to make several attempts to break the 200MA instead of falling through it cleanly - although this is purely a short term concern, and news/data should ultimately drive the direction.


Identifying that we are currently in a MEDIUM TERM bearish cycle is not a guarantee that the cycle will not end abruptly - and thus adding increasingly bearish exposure is not automatically our plan. Rationally, the more depressed equity prices become, the more dangerous it is to bet on that decline continuing. In later articles, we will probably discuss the investment options available to us during this kind of cycle. By paying attention to the SHORT TERM analysis - especially how the US indices perform around their 200 day MAs, we can adjust our exposure appropriately.






GOING FORWARD

So our MEDIUM TERM analysis identifies cycles such as the one we anticipated in late February. Are we looking for signs to tell us when this cycle could lose momentum or end? In our regular day to day articles, we'll hopefully give on-balance arguments showing how each new piece of news or data affects our Big Macro Picture. Already by June 2012, we are looking forward at whether weaker oil/raw material prices and a more fairly priced Euro will start to show favourable effects before the end of the summer.

How about the LONG TERM view? We see each of our MEDIUM TERM cycles as month-to-month phases within LONG TERM bull and bear cycles. These we identify as 2000-2002, 2003-2007, 2008-2009, 2009-present.

Each MEDIUM TERM bearish cycle causes us to call into question whether or not we are on the cusp of a new LONG TERM bearish cycle. This cycle is no different - already many investors are questioning whether "we have another 2008 on our hands". As we mentioned in the 2011 article, there was only one time since 2009 when we seriously questioned the health of the LONG TERM trend - August-October 2011, when the US economy risked entering contraction.

Certainly there are many worrying signs for the health of the LONG TERM 2009-present cycle, mostly emanating from Europe. We've only used a limited handful of indicators in these two articles - but it's clear to see from the PMI charts above, the similarities between European conditions in 2008 and 2011-2012.

Most importantly though - it's very dangerous to assume the end of these cycles too early in the midst of a MEDIUM TERM bearish cycle. Doing so in late 2011 would for instance have been a grave mistake - with the S&P moving 25% to make new bull cycle highs. If we are already positioned for a MEDIUM TERM bear cycle, we don't need to be too aggressive and call for a new LONG TERM 2012-2014 bear market - because we would risk making inaccurate analysis and terrible investment decisions, if the economy returned to a bullish phase.

We are concerned for the current 2009-present cycle, and will continue to monitor the developments, but we're still some way off from a new bear market. Whether the US economy can decouple from Europe will play a large part in determining that - as well as monetary/fiscal measures taken by central banks/governments, the price of raw materials/oil, and whether activity in Europe benefits from a weaker Euro. We don't really like to speculate on how these factors will play their part - our only interest is what the data is telling us, and how it affects our investment activities. For now, as far as we're concerned, we're still in a 2009-present LONG TERM bull phase until the data explicitly indicates otherwise.





IN SUMMARY

We hope to have shed some light on our analysis techniques for the SHORT, MEDIUM and LONG TERM categories.


Please note - it is always worth being wary of "retrospective analysis", especially in the world of investment. This article, and the 2011 review, are simply designed to give context and get readers familiar with our style of analysis. That way, when we start talking about MEDIUM TERM analysis of leading indicators, hopefully people will know what we mean, and what those indicators have done since 2010. The articles shouldn't be taken as anything other than a guide for our point of view - the real test will be the day to day analysis we make in our regular articles.

We look forward to discussing our investment strategies and philosophy in upcoming articles, as well as practical analysis of the market and economic conditions.

Please don't hesitate to contact us via the comments section or at: bigmacropicture@gmail.com


Thanks for reading.





 




Mark A. Rogers
Big Macro Picture (founder)


















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