The Bad
There was plenty of bad news last week.
- Flash PMI indicators from Europe were weak (via multiple sources). I noted this source in last week’s preview. There is a thirst for data because we are so interested in news from Europe and China. The same pundits who express skepticism about “surveys” rush to embrace this source. I am watching, but with some caution. I like to see a longer track record.
- Initial jobless claims remained in the danger zone. Seasonal factors might still be in play, but I continue to regard this as bad news. Here is the long-term perspective in the chart from Doug Short:
- Greece is headed back to the front burner for market worries. Our key source on that topic, The New Athenian, notes both the demanding requirements and the slow progress toward meeting Troika requirements. The Greek dilemma remains on the agenda for a Euro solution.
- Gasoline prices rise again — up more than four cents. Check out this and other “mixed” high frequency indicators from Bonddad.
- Leading Economic Indicators had a slight decline. Doug Short puts this in historical perspective:
The Ugly
Denard — not at his best. I am expecting a rebound from my favorite college player, but this is a great illustration of dispassionate investing versus emotion! I am cheering for Michigan — as usual — but not investing:)
Meanwhile, readers are invited to submit ugly news that I should have noted!
The Indicator Snapshot
It is important to keep the current news in perspective. My weekly snapshot includes the most important summary indicators:
- The St. Louis Financial Stress Index.
- The key measures from our “Felix” ETF model.
- An updated analysis of recession probability.
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 moved a lot lower, and is now 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.
The C-Score is a weekly interpretation of the best recession indicator I found, Bob Dieli’s “aggregate spread.“
Bob and I recently did some videos explaining the recession history. I am working on a post that will show how to use this method. As I have written for many months, there is no imminent recession concern. I recently showed the significance of by explaining the relationship to the business cycle.
The evidence against the ECRI recession forecast continues to mount. It is disappointing that those with the best forecasting records get so much less media attention. The idea that a recession has already started is losing credibility with most observers. I urge readers to check out the list of excellent updates from prior posts.
Readers might also want to review my new Recession Resource Page, which explains many of the concepts people get wrong.
The single best resource for the ECRI call and the ongoing debate is Doug Short. This week’s article describes the complete history, the critics, and how it has played out. The post highlights the most important economic indicators used in identifying recessions, showing that none have rolled over. Doug updates the recession debate every week and includes a great chart of the “big four” indicators used by the NBER in recession dating.
This has become a mandatory weekly read for those who are still worried about a new recession.
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. This week we continued as bullish after a brief stint at “neutral.” These are one-month forecasts for the poll, but Felix has a three-week horizon. The ratings have moved a little higher, and the confidence has improved from last week. It has been a close call over the last few weeks.
[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.]
