Tuesday, October 15, 2013

Recession Ahead?...FED Official: Taper Off the Table

”…we continue to view economic activity as much closer to the border of recession than is widely appreciated. New unemployment claims tend to reach their lows at bull market highs, and are not useful as forward-looking indicators. Moreover, we’ve observed a collapse in the correlation between historically more reliable leading measures (purchasing managers indices, Fed surveys) and subsequent economic outcomes over the past few years (see When Economic Data is Worse than Useless). Probably the most straightforward approach is to cut straight to key measures such as real GDP and real final sales, where year-over-year growth is already below the levels at which recessions have typically started. Given the predictive breakdown in a whole host of measures, it’s not clear that we should draw strong predictive conclusions from this evidence either. Still, it should be evident that the U.S. economy remains at levels of activity that have historically bordered recession.  Doug Short always offers useful perspective on a wide range of data. The chart below is no exception.”  - John Hussman, Phd. Weekly Market Commentary from Hussman Funds at…
Chart from Advisor Perspectives:

A few of the 22 follow:
“#1.  According to Gallup, we have just seen the largest drop in U.S. economic confidence since 2008.
#8.  Overall, corporations announced the elimination of 387,384 jobs through the first nine months of this year.
#9.  The number of announced job cuts in September 2013 was 19 percent higher than the number of announced job cuts in September 2012.
#17.  Obamacare is causing health insurance premiums to skyrocket and this is reducing the disposable income that consumers have available.
#18.  Median household income in the United States has fallen for five years in a row.” 
Commentary from ZeroHedge at…

I follow the spread between the S&P 500 and the Morgan Stanly Cyclical Index (calculated on a percentage basis) to track the market’s recession concern since cyclical stocks are more recession sensitive.  Over the last 2-weeks the cyclical stocks have underperformed the S&P 500, but not by much.  Over the longer term cyclicals are outperforming the S&P 500.  The short answer is: Market participants currently are not anticipating a recession. 

“One of the Federal Reserve's most outspoken critics of asset purchases has essentially given up hope for a policy change at a meeting later this month in light of the fiscal standoff in Washington… "My personal opinion is that it's not in play," Richard Fisher, president of the Federal Reserve Bank of Dallas, said of the possibility that the central bank will reduce its quantitative-easing program at an Oct. 29-30 policy meeting.”  Story at…

Tuesday, the S&P finished down 0.7% to 1698 (rounded) at the close.  
VIX rose 16% to 18.66 so the options market seems much more worried than the stock market…at least for today, Tuesday.

The 10-day moving average of stocks advancing fell sharply to 46% from yesterday’s reading of 51%. (A number below 50% for the 10-day average is generally bad news for the market.) 

New-highs outpaced new-lows Friday, leaving the spread (new-hi minus new-low) at +93 (it was +161 Monday).  The 10-day moving average of change in the spread is minus 8.

Market Internals are now negative on the market for this short term indicator as today we had a quick whipsaw change in direction on the internals.  Depending on the Politicians it would be easy to forecast a dramatic turn up or a crash.  Why bother?  Who knows what those clowns will do.

The overall long-term NTSM analysis remained HOLD at the close. 

I think once the debt ceiling is resolved we will see a bounce followed by losses – basically a “buy the rumor; sell the news” reaction.  In the end we’ll have to see how the market reacts to make any longer term decisions.

I remain about 20% invested in stocks as of 5 March (S&P 500 -1540).  The NTSM system sold at 1575 on 16 April.  (This is just another reminder that I should follow the NTSM analysis and not act emotionally – I am under-performing my own system by about 2%!)  I have no problems leaving 20% or 30% invested.  If the market is cut in half (worst case) I’d only lose 10%-15% of my investments.  It also hedges the bet if I am wrong since I will have some invested if the market goes up.  No system is perfect.

So far in 2013, the NTSM system has not performed well.  NTSM has earned 10% vs. a buy and hold system that would currently be up 23%.  Why?

I’d say that’s the result of multiple QE by the FED for which there is no precedent.