Sunday, October 22, 2017

Using Time, Scaling and Inflation to Frame Data (and Mislead Readers)

Summary:  How data is presented has a significant affect on the conclusion a reader will draw. Behavioral economists call this framing: "what you see is all there is." Presented below is a mental trick used to mislead readers.

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Over the past 85 years, the S&P stock index has grown 35,600%. The rise looks parabolic. The conclusion appears to be that it is unsustainable (data from Robert Shiller).

Friday, October 6, 2017

October Macro Update: Hurricanes End 83-Month Employment Expansion

SummaryThe macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least a year and in several instances as long as 2-3 years. On this basis, the current expansion will last well into 2018 at a minimum. Enlarge any image by clicking on it.

Saturday, September 30, 2017

Weekly Market Summary

Summary:  The major US indices traded at new all-time highs (ATH) again this week, led by surging small cap stocks. SPX is now higher 6 months in a row and 10 of the past 11 months; that level of momentum has never marked a bull market high.

Short-term optimism has reached an extreme that has resulted in a lower weekly close within the next 6 weeks every time over the past 5 years.

The fundamental narrative for the current rally is that the Trump administration's tax plan will boost earnings by an estimated 6%. If investors expect the tax plan to also cause economic growth to accelerate, then they are very likely to be disappointed.

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SPX, COMPQ, RUT and NYSE made new all-time highs (ATH) again this week.  SPX has been up 5 of the last 6 weeks. The dominant trend remains higher. Enlarge any image by clicking on it.

Sunday, September 24, 2017

Weekly Market Summary

Summary:  The major US indices all traded at new all-time highs (ATH) this week. Even the lagging small caps index closed at a new ATH on Friday, and transports are very near a new ATH. Persistent strength like that seen throughout 2017 has almost always continued into year-end. However, like last week, a few studies suggest short-term upside will likely be limited. The third quarter ends on Friday.

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US equities are now in the second longest and second strongest bull market of the post-war era. Enlarge any image by clicking on it.

Friday, September 15, 2017

Weekly Market Summary

Summary:  The major US indices all recorded new all-time highs (ATH) this week. The very broad NYSE, covering 2800 stocks, also made a new ATH, suggesting the rally is supported by adequate breadth. Longer-term studies and the fundamental macro data continue to indicate that further upside into year-end is odds-on. Remarkably, a new survey shows that fund managers are the most underweight US equities in 10 years, despite the SPX rising 9 of the last 10 months by an impressive 17%.

On a short-term basis, there are several reasons to be on alert for weakness over the next week or two.    An important FOMC meeting is on deck for Wednesday.

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US equities remain in a long term uptrend. SPX, DJIA, NYSE, COMPQ and NDX all made new all-time highs (ATH) this week.

Long-term uptrends typically weaken before they reverse strongly. Note the bottom panel: the 20-wma will flatten in advance of a significant correction to price (yellow shading). This process has not started yet. That doesn't mean that an intermediate-term fall of 5-8% is unlikely; in fact, a correction by that amount is common in most years. But any such fall is likely to followed by a rebound to the prior highs before a more siginificant correction ensues.