US ECONOMY (October 18th 2012): Unemployment Claims Spike - but DON'T TRUST THE HEADLINES, the TRUTH is less exciting

Last week we wrote an article on the subject of Weekly Jobless Claims, suggesting that the 339k reading (a multi-year low) might be considered the first sign that QE3 was being felt in the labour statistics.

You can read that here.

However, it was soon made clear that part of this was a technical difficulty, with some of the claims not being recorded in that data release.

There has been a lot of buzz this morning about today's release of Weekly Jobless Claims, which unlike last week, stand near the highest recording of the year, at 388k.

We'd like to very quickly clear up that neither 339k nor 388k readings can be considered normal or accurate, and that it would be more reasonable to simply say that an average of 365k was recorded across the two weeks.

The reason being, both the 339k reading (revised up to 342k) and 388k readings are distorted by a hangover in claims making last week seem too good, and this week seem too bad.

It's very simple, in our analysis, we'll consider 365k to be the last two weeks' worth of readings. Funnily enough, that is almost exactly what analysts had forecast for both weeks.

There is no conspiracy in the first week of 339k claims, and no rampant shocking increase this week, it is simply a glitch in the data. Please don't be fooled by the political headlines, or prominent figures trying to paint the data in any other way - sadly it is nothing that interesting. Just take both weeks as 365k, which is what analysts expected for both weeks.

SO IF BOTH WEEKS ARE 365K, HOW DOES THAT CHANGE OUR VIEW?

Let's look at the chart as it will read in the record books, and the chart how we see it at BigMacroPicture (charts courtesy of the superb ForexFactory Calendar).

So we can still see the bullish downtrend in Claims until around February/March 2012 (350-360k). Then we see Claims spiking higher into the summer (365k-390k).

With last week's 339k reading, we had hoped a new trend of making new lower lows would commence, before we realised the technical error in the report.

With two readings of 365k instead, we must retract that statement for the time being. Not only have we failed to make a lower low in Claims since February (351k), Claims remain stubbornly high, with only very mild evidence of much recovery from the summer's 370k+ readings.

This is by no means a signal that things are worse than we expected, just that last week's analysis is invalidated until new genuine lows can be made in Unemployment Claims.

As such, we still wait for the first signs that QE3 is helping the US jobs market, which might only show up in the data after the US Presidential Election.

AND THE IMPLICATIONS FOR INVESTORS?

The market remains convinced that data points like these will improve over time, thanks to QE3, and that employment/consumer/business conditions will eventually start to improve in the data.

It began pricing that improvement in June, when equity market's bottomed - and has rallied to 2012 highs, even if that isn't too shocking from a valuation point of view.

Despite this, there are still a lot of factors suppressing equity markets at the moment, in terms of guidance (often a backwards-looking indicator), earnings (for a quarter we knew would be disappointing), skepticism over the global economy, and worries over the US fiscal cliff.

So there is still room for US equities to move higher if the data does start to improve - especially if the Presidential Election goes off without a hitch and the "fiscal cliff" issue is resolved.

However, it is highly likely that to some extent, the market is already partially assuming the data improves and the issues are resolved. The "no improvement in data" and "no fiscal deal" scenario would still serve as a serious risk to equity markets at these levels - so it is worth being patient and cautious with position sizing.

As ever, we'll continue to provide up to date analysis of these important economic indicators as they are released, and analyse the implications for investors and traders.

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US ECONOMY (October 16th 2012): Capacity Utilization Rate

The US Capacity Utilization Rate is an indicator to be respected.

Very few monthly economic indicators show long term trends in the US economy quite as simply as the CUR. It is exceptionally useful for providing noise-free, long term bullish and bearish cycles in the US economy, when viewed on longer timeframes.

If I had to give a complete novice ONE MONTHLY INDICATOR to describe how the economy is broadly doing, without noise or complications, I'd give them Capacity Utilization.

While it isn't a leading indicator, it is simple to use, and simple to understand the main trend. As you can see below, it is very effective for identifying different phases in economic conditions.

Charts Courtesy of Forex Factory

On the first chart, we can tell from 2000 to 2012 how broad cycles of expansion, contraction and consolidation take place. Unlike some of our other favoured indicators for month-to-month analysis, there are very few anomalous results - and there is little in the way of hyperbole or hysteria. Just big, broad, smooth trends in the US economy, which anyone could use to determine economic trends.

As we pointed out, unlike our other favoured indicators, this one is not a leading indicator - but rather, serves as long term confirmation of economic trends, without much fuss. We would never use CUR for instance, to try and pick out what the market is doing this month or last month - the easiest way to understand it is to check it out and play with it yourself:

US Capacity Utilization Rate (Forex Factory Chart)

SO WHAT IS CAPACITY UTILIZATION TELLING US NOW?

We can use US CUR as a confirmation indicator, to help us identify what part of the economic cycle we're in. We can use the trend to show us whether we want to be allocating capital towards businesses or not, via the equities market.

We know that over the course of several months, or even over a year, Capacity Utilization will consolidate at "mature" stages of a long term bullish or bearish cycle. It will also trend upwards, or downwards, in the middle of bullish or bearish cycles.

For instance, between 2006 and 2007, Capacity Utilization flattened out, before beginning to fall at the start of a new bear market. In 2002, like many economic indicators, it flattened out before recovering in 2003 - the start of a new bullish run for stocks. In 2009, it sharply turned around and confirmed we had entered a new expansionary bullish phase.

Only two months ago, in August, Capacity Utilization made new multi-year highs. However, in September and October, CUR fell quite sharply. At 78.0% and 78.3%, these are the two worst readings of 2012 so far.

What does this mean for our current cycle?

Well, pulling a chart up since 2009, the trend is clearly up. And while 78.0% and 78.3% are the worst two readings of 2012, they are still better than any number we saw in 2011. So we're clearly not in a confirmed bearish downtrend phase for the US economy at this time.

What it does mean however, that compared to January's 78.6% reading, the indicator has made zero progress in 2012 based on the last two readings, if the year ended now.

That compares with 2009: troughed at 68.1%, December reading at 71.5% (new trend high)

2010: January at 71.9% (the year low), December reading at 75.4% (the year high)

2011: January at 76.2% (the year low), December reading at 77.8% (2nd highest of year)

Considering Capacity Utilization was at 78.0% in November 2011, we can be suitably concerned that little progress has been made judging by September and October 2012's numbers.

We know it is not uncommon for this indicator to reflect weak medium term conditions, and 2012 has seen economic weakness from March throughout the summer. Given the advent of QE3, we would not be surprised to see CUR recover and make new highs in the coming months, and re-affirm the 2009 bullish trend. However, our point is, we'll have reasons to be worried if September/October's reading is not a blip.

If CUR does not continue making new highs, and plateaus at around this level, we would be concerned for the ongoing health of the 2009-present expansionary phase for US business conditions. At the very least we would have to acknowledge the maturity of the current cycle, perhaps similar to 2006.

AND WHAT ABOUT IMPLICATIONS FOR INVESTORS?

This is somewhat trickier to discuss.

Being a % indicator, Capacity Utilization oscillates between values of 0 and 100, depending on how much industrial capacity is being utilised in the United States. It does not account for the efficiency, productivity or technology being utilised in that space, or the profit (in dollars) that each company is making.

Perhaps most importantly, it says nothing about the valuation of businesses, only the trend in an ongoing cycle.

So as a stand-alone investment tool, there are obvious limitations, something that stretches to plenty of economic analysis.

However - in this market from 2000 onwards - identifying and understanding these patterns has been crucial to allocating capital.

In the absence of technological advances, deregulation or other "secular bull market triggers", earnings-multiple valuations have been generally suppressed in stocks, while the Dow has ranged between about 7k and 15k.

Timing has been extremely important - and that timing has depended on effective analysis of economic cycles. The US Capacity Utilization Rate has been one of the most sound indicators out there during that time for identifying those bull and bear markets.

So, whilst we remain in that environment, we feel it is important that equity investors pay close attention to whether or not - over the course of 2012/2013 - the US Capacity Utilization Rate returns to its bull market trend of higher highs.

At Big Macro Picture, we'll keep you up to date with our analysis of this indicator, what it's telling us about global macroeconomic trends, and what it could mean for global equity markets.

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US ECONOMY (October 11th 2012): US Jobs and Unemployment Improvment As We Approach US Election? Believe the Stats, is the Recovery Real?

With the US Presidential election just weeks away, the various US unemployment statistics have come into very sharp focus from the wider public and mainstream media. The economy, we're told, will be the most important factor as American voters head to the polls to elect either Mitt Romney or re-elect Barack Obama for a second term.

Democrats might, in that case, be flooding Federal Reserve Chairman Ben Bernanke's mailbox with Christmas Cards this year, as the Fed's latest QE program could be helping the US economy just in time for the election.

We say that with the release of today's Unemployment Claims, a dramatically improved multi-year low, far better than analysts had estimated - possibly the earliest sign that QE3 has begun helping the US economy.

We'll add a few caveats here - firstly Unemployment stats are prone to revision, seasonality formulas, data outliers, and are not the best natural leading indicators for the economy. However, the overall trend in Unemployment Claims is a useful one, as we can correlate "improvement phases" with good returns in equity markets, and more broadly bull/bear markets when claims fall over time.

From March 2012, we stopped seeing a material improvement in US Weekly Unemployment Claims - something that contributed to our view that a medium term "bearish phase" had begun for the US economy, likely to last several months.

We consider that bad trend for US economic data to be over, and that the market already reflects data materially improving (as today's data suggests) between now and the end of the year courtesy of QE3. This data release is perhaps the first to reflect that properly - the lowest reading since the 2009 bull market began, and a return to the overall "falling" trend in Claims.

Let's see how this compares with the other US Employment stats from last week, including the highly controversial 7.8% Headline Unemployment Rate.

Check out the problems we have with Unemployment stats in general here.

In short, we think Non Farm Payrolls are overrated as an economic indicator, that ADP is often a better reflection of economic trends, and that the Headline Unemployment Rate is not very useful for investors.

So much has been written on the 7.8% Unemployment rate this week, including claims that the BLS have somehow altered the statistics to favour Barack Obama and the Democrats. We simply don't believe those conspiracy theories, on grounds of realism and lack of motive. Also, because the Unemployment Rate is a fairly lousy indicator for whether the economy is going in the right direction.

Just take a look at the Unemployment Rate chart. It's telling us that the US economy has been in an expansionary phase since late 2009. That's something we could have told you in early 2009. We don't want to find out that the Titanic is sinking when the Band is already playing on deck and the hull is pointing in the air - we want to know as soon as we hit the iceberg, and preferably a lot sooner than that. Our message is - look at the indicators which work, and not the ones which consistently lag the others.

Our other Unemployment statistics, ADP and Non Farm Payrolls, certainly reflect that unlike May, job growth isn't sliding anymore. There isn't a downtrend in job growth - but there isn't much of a recovery trend yet either. This is why today's data is so important - it is the first sign that these indicators will likely start getting better as 2012 comes to a close.

SO WHAT DOES THIS MEAN FOR INVESTORS, AND THE ELECTION?

We don't like getting into politics much at Big Macro Picture, and try to remove as much political spin as possible from how data is reported. This writer, for one, has no vote in the US election (I'm British) and has a very moderate, sceptical view when it comes to politics on a whole.

However, we cannot deny that the US election is an important event for the market, as is the ongoing state of the US economy.

Assuming today's Unemployment Claims figure is not a massive outlier and isn't revised dramatically higher, it could be foreshadowing an improvement in other economic indicators in the coming weeks and months. For the election, it might mean Obama's chances improve, if American voters really look at economic data.

For investors, we reiterate what we have said previously.

QE3 really needs to work for the 2009-present bull market to continue. The market has already looked forward, anticipating not only we'd get QE3, but that it would work.

This could, possibly (it's not 100% guaranteed), be a sign that QE3 will work - or at the very least, that something has caused the US economy to continue its 2009 trend of improvement.

However, from June onwards, we need to keep in mind the market has been pricing this in, without really pausing for breath. Now we have noise in the market from backwards-looking earnings, reflecting all the poor conditions we knew about a few months ago.

So, while the green shoots of real economic improvement are there, we do need to keep in mind that technically the market may want to retreat based on election uncertainty and tough earnings from earlier this year. A lot of improvement is indeed priced in.

Should we get a material retreat in equity prices, and data does indeed improve, we may wish to increase exposure to stocks without chasing risk.


In the meantime, please enjoy this detailed alternative graphical perspective of the Fiscal Cliff issue, which we believe tackles the contrarian aspects of investment, the "wall of worry" investment thesis, and a market-oriented psychological analysis of how the market might approach such a economic significant event, in a way that differs from the consensus viewpoint.

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EQUITIES MARKET ANALYSIS (October 6th 2012): How we use the Bullish Percentage Indicator, What is BPNYA saying about the Rally?

 

HOW WE USE THE BULLISH PERCENT INDICATOR

 
Readers of our 2011 and 2012 (so far) Reviews will notice we like to use the Bullish Percentage indicator in our analysis for MEDIUM TERM market trends.

2011 was a notoriously difficult year for attempting to manage portfolios in the face of volatility. While we're big fans of using trends in Economic Analysis to assist us, the BPNYA alone might have offered the following guidance last year: 

• 1) From Q3 2010 onwards, maintaining an increasingly bullish stance
• 2) From February-April 2011 adopting increasing caution, perhaps consider taking some profits
• 3) From May-October, revert to being net short, protect downside risk or avoid buying stocks
• 4) Consider adding to long term holdings in extremely oversold August and early October conditions
• 5) Gradually ease back in and buy on the dips between October and early 2012

BPNYA from Q3 2010 (after QE2) troughing in July, bullish from September

BPNYA warning us in March 2011, falling to oversold levels and then recovering by 2012

This is of course written in hindsight and perhaps should be treated with skepticism - but the Bullish Percentage Indicator (BPNYA) in 2012 continues to help investors navigate difficult market conditions. At the very least, it helps to indicate how sentiment is evolving in the overall stock market on a month-to-month basis.

BPNYA, the NYSE Bullish Percent Index, is a 0-100% value demonstrating the percentage of NYSE stocks with a "Bullish" Point and Figure char signal. In other words, what % of the broad NYSE market is bullish, and how is that changing over time?

There are many different interpretations for this indicator - at Big Macro Picture, we have a unique way of using it. The Weekly BPNYA chart helps us classify MEDIUM TERM bullish or bearish cycles, which might last anywhere between 3-9 months. Keep in mind those cycles (often for instance, bearish May until September, in many years) take place within bigger LONG TERM cycles - so we can have a bearish Medium Term view within a bullish Long Term view.

WHAT HAS THE BPNYA BEEN SAYING BEFORE NOW?

We commented on the Weekly BPNYA indicator falling beneath its 20 Week Moving Average in early April this year, when the Dow was around 13000. Being a leading indicator, a sign of the overall market breadth, the market generously gave plenty of opportunities to sell between 12850 and 13300 once the signal was offered in April.

Between May and early June, the Dow fell back to a low of 12050.

The BPNYA in that time would've acted like a sober man advising a reckless friend during a night of heavy drinking.

During the giddy overindulgence of the early part of the year, the BPNYA offered some signs of warning and caution from February onwards. "He's overdoing it now", the sober man might say in March, as his friend (the market) laughed it off, ordering another round of drinks.

While the sober BPNYA has no idea when that giddiness will end, it often knows before the market when the party is over and the night is about to end. It also rarely knows how severe the "sickness" and subsequent hangover will be -- only that hysteria, overreaction and dismay are usually the emotions that come next. "I told you so", the sober man might say, handing his friend a bucket.

And 2012 has often been both exuberant (in March, and arguably now in October) and despairing (in May), where the market is concerned. A sober judge of market breadth is extremely useful while the market is weighed down by economic fears, and subsequently buoyed by central bank easing. As we've alluded to in other articles, June-present has seen a market rally that economic indicators have missed until very recently.

WHAT IS BPNYA SAYING ABOUT THIS CURRENT JUNE-PRESENT RALLY?

Our BPNYA analysis comes in varying different stages - it is an indicator capable of telling us many things about the "stage" or "mode" the market is in.

In early June, the indicator troughed, and failed to make any more lower lows. In mid-June, BPNYA crossed back above its 20 day moving average and stayed above it, the first traditional short term "buy signal" often used by swing traders.

In early August, it crossed back above the 20 week moving average - which should normally serve as confirmation that a MEDIUM TERM bear phase has ended, and a new month-to-month bull phase had begun. At that stage, we can more confidently buy dips in the US indices.

The BPNYA tends to show us trends in the market without much fuss or noise, in normal market conditions. Simply following this trend from June onwards would have yielded satisfactory results - and that trend is usually fairly clear, making striding white Marubozu candles on most weeks.

Then, in the second week of September, BPNYA crossed above the 70 level. This is an interesting point - where an investor can take two different views. The market enters a stage of exuberance when making sustained moves above 70 on BPNYA, as a considerable majority of US stocks look bullish. So our first point of view is, "don't stand in the way of the market", as the market is likely to push ahead. We might want to close short positions on dips, or temporarily shed some of our downside protection - with a view to getting better prices to do so later.

The second point of view is that when the market gets carried away, it can often become overbought, and ugly scenes can ensue if that trend changes. So, at that stage, we're also waiting for the market to run out of steam. When BPNYA flattens out, and then begins diverging/falling sharply, we know to reverse positions or take profits.

Charts Courtesy of the Excellent StockCharts.com

We can see this on the chart above - note how quickly and definitively the trend changes in early June, and how the 20 week moving average is crossed in early August.

This brings us to our crossroads point in October 2012. The BPNYA hasn't made a new high in a couple of weeks, and since mid-September has been consolidating. In 2011 and earlier this year, BPNYA spent 9-10 weeks consolidating in this way - making new Dow/S&P highs in the process - before diverging from the market and falling.

Similarly, despite BPNYA not powering into the overbought 70s levels, the Dow closed at a new cycle high on Friday. We will continue to watch the market breadth indicators for developments as it remains in this consolidation phase. If it begins to fall violently, diverges from the market, or continuously fails to make new highs along with the market, we will begin to take profits on long exposure.

On the other hand, if it makes new highs and embeds itself above the 70 level, we will continue to take BPNYA as strong evidence that the rally could continue - and that 14000 may come sooner rather than later on the Dow Jones Industrial Average.

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GLOBAL ECONOMY (October 1st 2012): Resurgent Global PMIs - Old Trend is Ending, But How Much is Already Priced In?

The global PMI reports released each month from Markit, ISM, HSBC and JP Morgan, all serve as key indicators in our view of global macroeconomics trends.

PMI SO FAR THIS YEAR

It has been global PMI data which has kept us most concerned this year. On February 22nd, coinciding with a breakdown in market breadth indicators, PMI reports from Europe started to reverse their 2011 recovery - something which had been key in triggering a market rally up to that point.

Next came Japan and China, who had endured a fragile 2011 - they both began to signal further deterioration in their economic activity as 2012 progressed. Finally, most recently, the US economy completed the set by slowing down dramatically this summer.

In spite of the market's optimism (fuelled by forward-looking solutions to this economic slowdown by central banks), we continued to cite the poor economic data - and expressed doubts over the Fed's willingness to launch QE3 before the US Presidential election. Once QE3 was announced, we acknowledged that the market could now "ignore" present conditions, feeling that the data would start to improve by the winter - while at the same time expressing the risk of market disruption if QE3 did not work by then.

THE NEW PMIs THIS MONTH

So, with the market now "guessing" that QE3 will produce a positive outcome by the end of 2012, we're left waiting to see what the data does in the meantime. While we might be too early to see the effects of the Fed in today's ISM Report, the ECB's actions in the summer were greeted with satisfaction from the market -  are those actions being reflected in better economic data?

And what about the effect of the Euro dramatically strengthening against the dollar in recent weeks? Would it be negated by an improvement in economic activity? We take a look at data from some of the most important economies in the world:


Let's start with China - posted 47.9 in September, up slightly from 47.6 in August. It's still below 50 (deteriorating), and New Export Orders fell disastrously to multi-year lows. This is still quite a bit worse than earlier this year, and as manufacturing exports are a huge part of the Chinese economy, we have good reason to take notice. However, on a positive note, the trend hasn't gotten worse this month. We're not told anything new about the Chinese economy - it continues to slow, but neither more or less dramatically than last month. The more "official" version of PMI, released this morning, reflecting the same scenario.


Japan - improved to a three-month high of 48.0 in September (August: 47.7), although still below the 50 mark. The report cites the over-valuation of the Yen as a significant factor. Japanese PMI remains weak, without too much improvement. We can be encouraged that like China, it failed to make a lower low in that trend, but in both cases we will want to see another improvement next month.


Russia - improved to a four-month high of 52.4 in September, up from 51.0 in August. In shocking contrast to the rest of the world, this report argues the potential for monetary tightening in Russia. The report cites the impressive growing domestic demand within the Russian economy - and of course, the softening of any international trade slowdowns, courtesy of a robust energy export market. While we cannot really draw global conclusions from Russia's PMI reports, it is interesting to see a strongly-performing economy without as much correlation to the rest of the world.


Spain - improved from 44.0 to 44.5. The epicentre of ongoing European concerns, economic conditions in Spain are extremely relevant in 2012. August, September, and now October have seen very clear signs of improvement in the Spanish economy, from a very low base. Between mid-2010 and mid-2011, the Spanish economy stagnated. From mid-2011 onwards, along with the rest of the world, the Spanish economy worsened - at a very worrying rate of decline between March and July 2012. The improvements in the last three months show a justification for a rally that began with Mario Draghi and the ECB. The recovery in Spanish 10yr yields reflects this quite clearly - we will hope to see this recovery continue into 2013.


Italy - climbed to a six month high of 45.7 in September, from August’s mark of 43.6. The Italian economy has shown less convincing signs of recovery than Spain this summer, stagnating around the lows for 2012. While there isn't a "recovery trend" to speak of, this month's jump up to six month highs is reflective of the good news coming from peripheral Europe. While we don't wish to comment on whether ECB policy is "working", the data is certainly better in September than a few months ago.


France - recorded 42.7, down from 46.0 in August, the worst reading since April 2009. This is a frankly disastrous report. Worryingly for France, a lot of this was down to domestic woes, a loss of confidence in the French economy, and the postponing of new orders in France. This led to the backlog of work being severely depleted, a bad sign for the French economy going forward. Low demand in France can be attributed to many things, but low business confidence perhaps relates to French fiscal policy under President Hollande.


Germany - 47.4, up from 44.7 in August. In contrast to France, a massive improvement in operating conditions and business confidence, despite the strengthening Euro. A very strong report, including a commentary suggesting that perhaps the German economy has troughed in its negative 2012 trend. The improvement in confidence came mostly domestically, although with the rest of Europe still slowly recovering, this might not be much of a surprise. Almost all headline indicators saw an improvement - a very important sign for the German, European, and Global economy.


UK - edged lower to 48.4 in September, from 49.6 in August. A messy indicator, not helped by an independent currency, which has strengthened considerably against the dollar this month. The UK saw its sixth month of decline in new export orders, with Europe and China showing the weakest demand. The commentary cites Europe representing 50% of UK exports, particularly unfortunate in 2012, as their biggest customer struggles with confidence and demand. As with the trend in most of Europe however, domestic demand is shown to have moderately picked up.


Eurozone Composite - 46.1 in September (six-month high, up from 45.1). This broad indicator tends to give us a smooth representation of the European economy as a whole. It peaked in March 2011, troughed in December 2011, peaked again in March 2012 and has now seemingly bottomed again, troughing in August. Two months in a row of improvement signal that PMI for Europe has, on a whole, picked up significantly - even though it remains in contraction.

While in the long run we'd much rather see these PMI stats above 50, improvement is good enough while European equity prices remain relatively depressed. 2009 would be a good example of that on a larger scale after the financial crisis. Most importantly, we have green shoots of recovery, and signs that a deteriorating trend (which began all the way back in February) has concluded.

Finally, we earlier saw the release of the US Markit PMI, and the widely followed ISM Manufacturing PMI.

US PMI - 51.5 up from 49.6, a marked improvement from the rest of the summer, and a move back to expansionary levels. US Markit PMI meanwhile showed a deterioration from 51.5 to 51.1 - with both versions explicitly indicating a US economy only barely growing. The important story from our perspective though, is the improvement in one of our most respected indicators for global growth, the ISM. As we stated earlier, it will take some time for QE to truly filter into the real economy - so ISM moving confidently away from multi-year lows is a positive sign.

OUR CONCLUSIONS

With another month of PMI data, we can draw some useful conclusions as to the MEDIUM TERM trend in the global economy.

Our preliminary view is that the MEDIUM TERM bearish trend, beginning on February 22nd, is most likely over.

The wheels were set in motion for this conclusion in June, when the market began strongly rejecting oversold conditions. Our preferred market breadth indicator, the BPNYA, troughed along with the market in June. By early August it had climbed above its 20 week moving average. And now, apart from France, almost every measure of global economic relevance has moved away from previous lows - fairly confidently in the case of Germany. There seems to be a broad sense of recovery in most developed economies, especially in Europe, the epicentre of 2012's slowdown.

Unfortunately, this isn't much of a bold prediction, given the market has moved substantially away from June lows. Unlike in late February, the market has moved several months before the data improved - courtesy of central bank easing.

As we alluded to in previous articles, this makes it difficult to use fundamental or market breadth analysis to gain an advantage - in fact, traditional fundamentalists will most likely continue to be baffled by the market in this current phase. In that type of scenario, which we also saw after QE2 in 2010, "don't fight the Fed" tends to be the easiest option. It remains to be seen how the market would react if that trend of recovery falters, or if the Fed's QE3 is deemed to be failing.

As for how to best recover from being "late to the party", if we're even at the party at all? We remain cautious. However, we acknowledge that many hedge funds in 2012 have found themselves in the same position - and there will be some degree of "performance chasing" as 2012 comes to an end. While we're more convinced than last month of the "green shoots of recovery" emanating from Europe, the market has gone up considerably, increasing the risk in buying at these levels. Also, the market breadth indicator BPNYA, has spent two weeks failing to make a higher high.

So - while we're saying that the February-August bearish MEDIUM TERM period is most likely over, if a new bullish trend has begun, an awful lot of the gains have surely been priced into the market already - and we're not sure if the potential reward is high enough to be too exposed to the market. It would take either "more attractive" entry points, or a truly impressive trend of recovery (including regions China and Japan, which have been tepid at best) to be willing to add much more risk at this stage.

That said, this month's data was fairly conclusive, and in another market this might have presented a very attractive buying opportunity. Fed intervention is the kind of anomalous event that cannot be mitigated for in terms of data analysis - and "better safe than sorry" is our preferred approach to the market.

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