The Bad
As always, there was a little bad news. Feel free to add in the comments anything you think I missed!
- Inflation remains too low. Economist Justin Wolfers notes this interesting aspect of the final revision of Q2 GDP, otherwise a snoozer. The implication is important for those who really want to understand Fed policy instead of stating their own opinions. Here is a key quote:
“The deeper problem is that the Fed’s target is widely perceived to be asymmetrical. Imagine the response among policy makers if headline inflation were running at 4 percent, and core inflation were at 3 percent. In the colorful words of Chicago Fed President Charlie Evans, they “would be acting as if their hair was on fire.” We’re experiencing the mirror image – an equivalent undershooting of the inflation target, but without an equivalent policy response.
With inflation continuing to undershoot the Fed’s inflation target, and millions remaining needlessly unemployed, policy makers need to start acting as if their hair were on fire.”
- Housing data presented a mixed picture. This is a key component of the recovery and is very complicated. There are many issues and measures, and plenty of room for interpretation in the results. Steven Hansen notes the weakening in pending home sales with plenty of charts and comparisons. Calculated Risk comments more on new home sales, concluding,
“The housing recovery has slowed, but it is ongoing – and I expect the recovery to continue for some time.”
- Consumer confidence continues to disappoint on both the Conference Board and Michigan measures. I regard these as good concurrent indicators for employment and spending. (More from Doug Short, including an update of the chart I cite so often).
- The confidence gap grows. Bespoke tracks an interesting breakdown in consumer confidence — those with incomes of $35K versus $50K. It is an interesting analysis leading to this key chart:
The Ugly
Congress is winning the “ugly” award so often that we might have to retire the original trophy!
The Indicator Snapshot
It is important to keep the current news in perspective. I am always searching for the best indicators for our weekly snapshot. I make changes when the evidence warrants. At the moment, my weekly snapshot includes these important summary indicators:
- For financial risk, the St. Louis Financial Stress Index.
- An updated analysis of recession probability from key sources.
- For market trends, the key measures from our “Felix” ETF model.
Financial Risk
The SLFSI reports with a one-week lag. This means that the reported values do not include last week’s market action. The SLFSI has recently edged a bit higher, reflecting increased market volatility. It remains at historically low levels, well out of the trigger range of my pre-determined risk alarm. This is an excellent tool for managing risk objectively, and it has suggested the need for more caution. Before implementing this indicator our team did extensive research, discovering a “warning range” that deserves respect. We identified a reading of 1.1 or higher as a place to consider reducing positions.
The SLFSI is not a market-timing tool, since it does not attempt to predict how people will interpret events. It uses data, mostly from credit markets, to reach an objective risk assessment. The biggest profits come from going all-in when risk is high on this indicator, but so do the biggest losses.
Recession Odds
I feature the C-Score, a weekly interpretation of the best recession indicator I found, Bob Dieli’s “aggregate spread.” I have now added a series of videos, where Dr. Dieli explains the rationale for his indicator and how it applied in each recession since the 50’s. I have organized this so that you can pick a particular recession and see the discussion for that case. Those who are skeptics about the method should start by reviewing the video for that recession. Anyone who spends some time with this will learn a great deal about the history of recessions from a veteran observer.
I also feature RecessionAlert, which combines a variety of different methods, including the ECRI, in developing a Super Index. They offer a free sample report. Anyone following them over the last year would have had useful and profitable guidance on the economy. RecessionAlert has developed a comprehensive package of economic forecasting and market indicators, including this recent update on the world economy.
Georg Vrba’s four-input recession indicator is also benign. “Based on the historic patterns of the unemployment rate indicators prior to recessions one can reasonably conclude that the U.S. economy is not likely to go into recession anytime soon.” Georg has other excellent indicators for stocks, bonds, and precious metals at iMarketSignals. For those interested in gold, he has a recent update, asking when there will be a fresh buy signal.
Unfortunately, and despite the inaccuracy of their forecast, the mainstream media features the ECRI. Doug Short has excellent continuing coverage of the ECRI recession prediction, now two years old. Doug updates all of the official indicators used by the NBER and also has a helpful list of articles about recession forecasting. Doug also continues to refresh the best chart update of the major indicators used by the NBER in recession dating.
The average investor who mistakenly focuses on these headlines has missed – and continues to miss – a major move, as we note in this week’s investor insights.
Readers might also want to review my Recession Resource Page, which explains many of the concepts people get wrong.
Our “Felix” model is the basis for our “official” vote in the weekly Ticker Sense Blogger Sentiment Poll. We have a long public record for these positions. Three weeks ago Felix turned bearish. I wrote, “Felix might switch to a neutral posture if the overall market holds its ground.” With the reduced chance of military action against Syria, the market celebrated the reduction in uncertainty. Last week marked a dramatic shift in the ratings, which remain slightly in bullish territory.
Felix does not react to news events, and certainly does not anticipate effects from the headlines. This is usually a sound idea, helping the trading program to stay on the right side of major market moves. Abrupt changes in market direction will send sectors to the penalty box. The Ticker Sense poll asks for a one-month forecast. Felix has a three-week horizon, which is pretty close. We run the model daily, and adjust our outlook as needed.
The penalty box percentage decreased again this week. A high rating means that most ETFs are in the penalty box, so we have less confidence in the overall ratings. That measure remains elevated, but it is improving.
[For more on the penalty box see this article. For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly ETF email list. You can also write personally to me with questions or comments, and I’ll do my best to answer.]
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