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How Long to the Next Recession? iM’s Weekly Update

Courtesy of Doug Short.

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.


The BCI at 179.2 is up from last week’s 178.5. The BCIg, the smoothed annualized growth of BCI, at 22.2 is at its highest level in the current business cycle, rising from last week’s 21.6. This week’s BCI does not indicate a possible recession in the near future.

Figure 1 plots BCIp, BCI, BCIg and the S&P500 together with the thresholds (red lines) that need to be crossed to be able to call a recession. Figure 2 plots the history of BCI, BCIg, and the LOG(S&P500) since July 1967, i.e. the last 44 years which include seven recessions, each which the BCI managed to indicate timely.


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The off-peak indicator BCIp is at 100, and at this level the BCIw graphic with the tracks to recession is not applicable.

The BCI, BCIp and BCIw are described in article 1, article 2 and article 3 respectively. Historic values of BCI, BCIg and BCIp can be downloaded from the author’s website.

Apart from the weekly Business Cycle Index, updates of a number of weekly and monthly financial macro models are also available on the website.


Anton Vrba and Georg Vrba
iM imarketsignals.com

Anton Vrba is an electrical engineer. He pursued a career in R&D, manufacturing and construction project management. He developed the iMarketSignals’ proprietary Business Cycle Index (BCI) and the authors’ website. His other interests are mathematics and physics. He is a lateral thinker and has many ideas that challenge the established and accepted explanations.

Georg Vrba is a professional engineer who has been a consulting engineer for many years. In his opinion, mathematical models provide better guidance to market direction than financial “experts.” He has developed financial models for the stock market, the bond market, yield curve, gold, silver and recession prediction, all published in Advisor Perspectives. The models are updated weekly at http://imarketsignals.com/.





New Jobless Claims at Lowest Since February 2006

Courtesy of Doug Short.

Here is the opening statement from the Department of Labor:

In the week ending July 19, the advance figure for seasonally adjusted initial claims was 284,000, a decrease of 19,000 from the previous week’s revised level. This is the lowest level for initial claims since February 18, 2006 when they were 283,000. The previous week’s level was revised up by 1,000 from 302,000 to 303,000. The 4-week moving average was 302,000, a decrease of 7,250 from the previous week’s revised average. This is the lowest level for this average since May 19, 2007 when it was 302,000. The previous week’s average was revised up by 250 from 309,000 to 309,250.

There were no special factors impacting this week’s initial claims. [See full report]

Today’s seasonally adjusted number at 284K was well below the Investing.com forecast of 308K.

Here is a close look at the data over the past few years (with a callout for the past year), which gives a clearer sense of the overall trend in relation to the last recession and the volatility in recent months.

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As we can see, there’s a good bit of volatility in this indicator, which is why the 4-week moving average (the highlighted number) is a more useful number than the weekly data. Here is the complete data series.

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Occasionally I see articles critical of seasonal adjustment, especially when the non-adjusted number better suits the author’s bias. But a comparison of these two charts clearly shows extreme volatility of the non-adjusted data, and the 4-week MA gives an indication of the recurring pattern of seasonal change in the second chart (note, for example, those regular January spikes).

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Because of the extreme volatility of the non-adjusted weekly data, a 52-week moving average gives a better sense of the secular trends. I’ve added a linear regression through the data. We can see that this metric continued to fall below the…
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The Big Four Economic Indicators: Real Retail Sales

Courtesy of Doug Short.

Note from dshort: This commentary has been updated with Real Retail Sales for June.


Official recession calls are the responsibility of the NBER Business Cycle Dating Committee, which is understandably vague about the specific indicators on which they base their decisions. This committee statement is about as close as they get to identifying their method.

There is, however, a general belief that there are four big indicators that the committee weighs heavily in their cycle identification process. They are:


  • Industrial Production
  • Real Personal Income (excluding Transfer Payments)
  • Nonfarm Employment
  • Real Retail Sales

The Latest Indicator Data

With this morning’s release of the June Consumer Price Index, we can now calculate Real Retail Sales for last month. Real Sales were essentially flat at -0.01% Month-over-Month. The Year-over-Year growth is 2.14%

Here is a chart of the monthly data points since 2009. I’ve included a regression to assist our visualization of the post-recession trend. The winter slow-down is clearly evident, with the dip below trend starting in December and a sharp plunge in January. February saw some improvement, and March almost took this indicator back to the trendline. But after two additional months of fairly standard growth, June was a disappointment.

The chart and table below illustrate the performance of the Big Four with an overlay of a simple average of the four since the end of the Great Recession. The data points show the cumulative percent change from a zero starting point for June 2009. We now have the first indicator update for the 60th month following the recession. The Big Four Average (gray line below).

Current Assessment and Outlook

The overall picture of the US economy had been one of a ploddingly slow recovery from the Great Recession, and the Winter data documented a sharp contraction. The early Spring appeared to support the general view that severe winter weather was responsible for the contraction — that it was not the beginnings of a business cycle decline. But the June Real Retail Sales suggest that our consumer-based economy remains a bit fragile.

The next update of the Big Four will be…
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Bulls Take Notice – Caution Suggested as Credit Markets and Equity Markets Diverge

Courtesy of Doug Short.

Summary

  • Divergence with small cap stocks and junk bonds persists.
  • Credit spreads widening suggests building short-term financial stress.
  • Markets oversold and how risk areas react will be telling.

One of the most widely followed market theories is Dow Theory, which has been around for more than 100 years. The essence of Dow Theory is to focus on confirmations or non-confirmations between the Dow Jones Transportation Average and the Dow Jones Industrial Average for assessing market trends and reversals. If one of the indexes breaks out to a new high while the other does not, we have a non-confirmation and the potential for a market reversal.

Similar to Dow Theory I like to look for confirmation between the stock market and the credit markets. When one market does not confirm the other, caution is advised. Typically I’ve found that when there is a divergence between the equity markets and the credit markets it is usually the credit markets that have it right. I believe this is the case because the average investor is far less invested in the credit markets than the equity markets and sadly the track record of the average investor is quite poor. As seen below, over the last 20 years the average investor’s annualized return barely beat the rate of inflation and underperformed every major asset class.

Click to View
Source: JPM, Market Insights 3Q 2014

When I see the credit markets not confirming the equity markets I take notice as the credit markets tend to lead the stock market at major turning points. The best example of this is the last two major turning points which were the 2007 top and the 2009 bottom. The Bloomberg Financial Conditions Index, which is a composite of credit spreads from the money market, bond market, and equity markets peaked well before the S&P 500 peaked in October of 2007 and also bottomed well before the S&P 500 bottomed in March of 2009. As seen below, the Bloomberg US Financial Conditions index peaked in early 2007 and put in a series of lower highs while the S&P 500 kept marching higher. Similarly, the credit markets put in a “V-spike” bottom in October 2008 while the equity markets didn’t bottom until nearly half a year later.


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S&P 500 Snapshot: Record Intraday and Closing Highs

Courtesy of Doug Short.

Key indexes around the globe are exhibiting little volatility in the wake global conflict. The Nikkei and Dow closed the day down 0.10% and 0.16%, respectively. The Eurozone’s STOXX 50 was up 0.12%.

The S&P 500 took center stage for US indexes, setting new intraday and closing records despite ongoing tensions in Europe and the Middle East. The index opened higher, quickly sold off to its -0.05% intraday low and then rallied to a record intraday high, up 0.29%. After a minor lunch-hour dip, it spent the afternoon in a narrow trading range to its 0.18% gain for a record close.

The yield on the 10-year note ended the day at 2.48%, unchanged from yesterday’s close. It is now only 4 bps above its interim closing low of May 28th.

Here is a 15-minute chart of the past five sessions. The S&P 500 is up 7.50% year-to-date.

Volume on the SPY ETF, which gives a rough sense of investor participation, was extremely light.

For a longer-term perspective, here is a pair of charts based on daily closes starting with the all-time high prior to the Great Recession.

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Two Measures of Inflation and Fed Policy

Courtesy of Doug Short.

Note from dshort: I’ve updated the accompanying charts with yesterday’s Consumer Price Index data from the Bureau of Labor Statistics. The annualized rate of change is calculated to two decimal places for more precision in the side-by-side comparison with the PCE Price Index.


The BLS’s Consumer Price Index for June shows core inflation at 1.93%. The Core PCE price index at the end of the May (the most recent data), is significantly lower at 1.49%. The Fed is on record as preferring the less familiar Core PCE as its inflation gauge.

The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee’s ability to promote maximum employment in the face of significant economic disturbances. [Source]  Note: Bolding added by me.

Elsewhere the Fed stresses the importance of longer-term inflation patterns, the likelihood of persistence and the importance of “core” inflation (less food and energy). Why the emphasis on core? Here is an excerpt from one of the Fed FAQs.

Finally, policymakers examine a variety of “core” inflation measures to help


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Gasoline Volume Sales, Demographics and our Changing Culture

Courtesy of Doug Short.

The Department of Energy’s Energy Information Administration (EIA) data on volume sales is over two months old when it released. The latest numbers, through mid-May, were published today. However, despite the lag, this report offers an interesting perspective on fascinating aspects of the US economy. Gasoline prices and increases in fuel efficiency are important factors, but there are also some significant demographic and cultural dynamics in this data series.

Because the sales data are highly volatile with some obvious seasonality, I’ve added a 12-month moving average (MA) to give a clearer indication of the long-term trends. The latest 12-month MA is 8.6% below the all-time high set in August 2005, a new interim low.

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The next chart includes an overlay of real monthly retail gasoline prices, all grades and formulations, adjusted for inflation using the Consumer Price Index (the red line). I’ve shortened the timeline to start with EIA price series, which dates from August 1990. The retail prices are updated weekly, so the price series is the more current of the two.

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As we would expect, the rapid rise in gasoline prices in 2008 was accompanied by a significant drop in sales volume. With the official end of the recession in June 2009, sales reversed direction … slightly. The 12-month MA hit an interim high in November 2010, and then resumed contraction. The moving average for the latest month is about 8.3% below the pre-recession level and 5.2% off the November 2010 interim high. For some historical context, the latest data point is a level first achieved in April 1998.

Some of the shrinkage in sales can be attributed to more fuel-efficient cars. But that presumably would be relatively small over shorter time frames and would be offset to some extent by population growth. For some specifics on fuel efficiency, see the Eco-Driving Index for new vehicles developed by the University of Michigan Transportation Research Institute. However, if we look at Edmunds.com for data on the top 10 best-selling vehicles, energy efficiency doesn’t seem to be the key decision factor,…
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Inflating the Big Mac One Calorie at a Time

Courtesy of Doug Short.

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.


The June Consumer Price Index (CPI) is up 2.1% from a year ago. The latest monthly rise was driven by the escalation of oil prices. However, this rate of increase is slower than what consumers are experiencing. This post has been updated from our post on May 15, 2014.

Continuing our research into using the Big Mac as a gauge of inflation, we build on past posts but use our own research to draw conclusions. In previous articles, we have relied solely on The Economist’s calculation of the Big Mac price. The Economist has been conducting the research sporadically since 1986. However, it was not until a few years ago that they began regular updates to their research in both January and July. Believing this span is too great, we have compiled our own look at the price of the Big Mac in the United States. Thanks to my assistant Geraldine Garcia, we have surveyed 30 McDonald’s restaurants throughout the nation to obtain the average price and compare that to the trend.

From our research, we have determined that the average price of a Big Mac is $4.57 (the range was $3.91 to $5.57), an increase of $0.12, or an increase in 2.7% from what we obtained in March. During the last 12 months, this represents an increase of 4.3% from 12 months ago when the price of a Big Mac was $4.38.

As stated in previous posts, I believe that the Big Mac provides a better indication of price movements than the government compiled CPI. Many of us can neither follow nor actually experience what the CPI means or how it moves. Conversely, the Big Mac is consumed constantly, and we shell out hard-earned dollars to purchase the sandwich. Thus, it is a real-time metric of our economy.

The Consumer Price Index (CPI) was reported to have increased 1.8% during the past 12 months. The Big Mac increased significantly more. This under-reporting of inflation impacts savers, investors, retirees, and those who receive Social Security, just to name a few

Placed Insights surveyed the eating habits of Americans to determine that individuals eat 17 Big Macs a second. This means Big Macs are eaten…
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Pssst … A Breakout in China?

Courtesy of Doug Short.

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.


Many major stock indexes in the United States and Europe are either at all-time highs or near them. One sixth of the world’s population can’t make the same statement.

The chart below illustrates that the Shanghai Index and the popular China ETF (FXI) have both greatly underperformed the S&P 500 over the past five years … by more than 100%!

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The next chart highlights that the Shanghai Index and FXI are both making another attempt to break from multi-year falling resistance lines at (1). At the same time the Shanghai index is setting on a support line that dates back almost 20 years, creating a multi-year pennant pattern that will come to an end pretty soon.

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Should the Shanghai index & FXI break resistance, buyers could well start purchasing these underperformers and push them a good deal higher. Could a breakout in China help push Europe and the States stock index’s even higher?

Stay tuned! This is a very interesting resistance point for investments that represent one sixth of the world’s population! Is a multi-year bullish breakout about to take place? This is an interesting price point for a major region of the world.

Kimble Charting Solutions
For information, send an email to services@kimblechartingsolutions.com.





S&P 500 Snapshot: An Intraday Record High

Courtesy of Doug Short.

The pre-open release of the Consumer Price Index showed core inflation in June to be a tad lighter than forecasts. The S&P 500 opened at its 0.10% intraday low and rallied to its 0.64% record intraday high about ninety minutes into the session. Strong existing home sales announced at 10 AM certainly helped. The index spent the rest of the day in a narrow trading range and closed with a 0.50% gain, a mere 0.10% off its record close of July 3rd.

The yield on the 10-year note ended the day at 2.48%, 1 bp below yesterday’s close. It is now only 4 bps above its interim closing low of May 28th.

Here is a 15-minute chart of the past five sessions. The S&P 500 is up 7.31% year-to-date.

Volume on the SPY ETF, which gives a rough sense of investor participation, remained light.

For a longer-term perspective, here is a pair of charts based on daily closes starting with the all-time high prior to the Great Recession.

Click to View
Click for a larger image

Click to View
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Help One Of Our Own PSW Members

"Hello PSW Members –

This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible.  Feel free to contact me directly at jennifersurovy@yahoo.com with any questions.

Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts.  After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.)  Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.

http://www.youcaring.com/medical-fundraiser/help-get-shadowfax-out-from-the-darkness-of-medical-bills-/126743"

Thank you for you time!

 
 

Zero Hedge

Silver Tumbles Most In 6 Months

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Silver is down almost 3% today - its biggest drop since the end of January as precious metals both tumble back towards pre-June-FOMC levels. News on China demand appears to be the main catalyst according to desk chatter (as well as a break through the key 50-day and 100-day moving-averages) with gold testing down to its 200-day moving average at $1286.

 

Worst day for Silver in 6 months...

 

Precious metals are reatracing gains from the June FOMC... (and testing technical levels)

...



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Phil's Favorites

Meanwhile, Ukraine's Government Collapses (PM Yatsenyuk Resigns)

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

As if Ukraine was not struggling through enough turmoil currently, Bloomberg reports that the fragile coalition government has collapsed after two parties quit. The UDAR and Svoboda parties said they’d leave the government and seek a snap parliamentary ballot. Tempers have been fraying recently as numerous brawls have broken out in parliament ahead of President Poroshenko's pledge to call elections this year. All we have to do now is find out who Washington would like to see in power? The end result: Prime Minister Yatsenyuk j...



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Chart School

How Long to the Next Recession? iM's Weekly Update

Courtesy of Doug Short.

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

The BCI at 179.2 is up from last week’s 178.5. The BCIg, the smoothed annualized growth of BCI, at 22.2 is at its highest level in the current business cycle, rising from last week's 21.6. This week’s BCI does not indicate a possible recession in the near future.

Figure 1 plots BCIp, BCI, BCIg and the S&P500 together with the thresholds (red lines) that need to be crossed to be able to call a recession. Figure 2 plots the history of BCI, BCIg, and the LOG(S&P500) since July 1967, i.e. the last 44 years which include seven recessions, each which the BCI managed to indicate timely.

...



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Insider Scoop

UPDATE: 3M Q2 Earnings Meet Estimates

Courtesy of Benzinga.

Related MMM Earnings Scheduled For July 24, 2014 Stocks To Watch For July 24, 2014 Nasdaq Seen Rallying on Apple, Facebook Results (Fox Business)

3M Company (NYSE: MMM) reported in-line earnings for the second quarter.

The St. Paul, Minnesota-based company posted a quarterly net profit of $1.27 billion, or $1.91 per share, versus a year-ago profit of $1.2 billio...



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All About Trends

Mid-Day Update

Reminder: David is available to chat with Members, comments are found below each post.

Click here for the full report.




To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...

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Option Review

Sizable Call Spread Trades On Orexigen

A large call spread initiated on Orexigen Therapeutics, Inc. (Ticker: OREX) on Monday morning looks for shares in the name to rally approximately 30% by September expiration. The September expiration is noteworthy as the company awaits the results of the FDA’s review of its resubmitted New Drug Application (NDA) for NB32, an investigational medication being evaluated for weight loss, after the review was extended for three months back in June. The upcoming Prescription Drug User Fee Act (PDUFA) date is September 11, 2014, according to a press release issued by the company. Shares in Orexigen today are up roughly 0.40% at $5.34 as of 2:15 p.m. ET.

...

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Sabrient

Sector Detector: Bulls remain unfazed by borderline Black Swans

Courtesy of Sabrient Systems and Gradient Analytics

Despite a highly eventful week in the news, not much has changed from a stock market perspective. No doubt, investors have grown immune to the daily reports of geopolitical turmoil, including Ukraine vs. Russia for control of the eastern regions, Japan’s dispute with China over territorial waters, Sunni vs. Shiite for control of Iraq, Christians being driven out by Islamists, and other religious conflicts in places like Nigeria and Central African Republic. But last Thursday’s news of the Malaysian airliner tragically getting shot down over Ukraine, coupled with Israel’s ground incursion into Gaza, had the makings of a potential Black Swan event, which in my view is the only thing that could derail the relentless bull march higher in stocks.

Nevertheless, when it became clear that the airline...



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OpTrader

Swing trading portfolio - week of July 21st, 2014

Reminder: OpTrader is available to chat with Members, comments are found below each post.

 

This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here ...



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Stock World Weekly

Stock World Weekly

Newsletter writers are available to chat with Members regarding topics presented in SWW, comments are found below each post.

Here's the latest Stock World Weekly. Please use your PSW user name and password to log in. (You may take a free trial here.)

#452331232 / gettyimages.com ...

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Market Shadows

Danger: Falling Prices

Danger: Falling Prices

By Dr. Paul Price of Market Shadows

 

We tried holding up stock prices but couldn’t get the job done. Market Shadows’ Virtual Value Portfolio dipped by 2% during the week but still holds on to a market-beating 8.45% gain YTD. There was no escaping the downdraft after a major Portuguese bank failed. Of all the triggers for a large selloff, I’d guess the Portuguese bank failure was pretty far down most people's list of "things to worry about." 

All three major indices gave up some ground with the Nasdaq composite taking the hardest hi...



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Digital Currencies

Bitcoin Vs Gold - The Infographic

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

While Marc Faber has said "I will never sell my gold," he also noted "I like the idea of Bitcoin," and the battle between the 'alternative currencies' continues. The following infographic provides a succinct illustration of the similarities and differences between gold and bitcoin.

Please include attribution to www.jmbullion.com with this graphic.

...

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Pharmboy

Biotechs & Bubbles

Reminder: Pharmboy is available to chat with Members, comments are found below each post.

Well PSW Subscribers....I am still here, barely.  From my last post a few months ago to now, nothing has changed much, but there are a few bargins out there that as investors, should be put on the watch list (again) and if so desired....buy a small amount.

First, the media is on a tear against biotechs/pharma, ripping companies for their drug prices.  Gilead's HepC drug, Sovaldi, is priced at $84K for the 12-week treatment.  Pundits were screaming bloody murder that it was a total rip off, but when one investigates the other drugs out there, and the consequences of not taking Sovaldi vs. another drug combinations, then things become clearer.  For instance, Olysio (JNJ) is about $66,000 for a 12-week treatment, but is approved for fewer types of patients AND...



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Promotions

See Live Demo Of This Google-Like Trade Algorithm

I just wanted to be sure you saw this.  There’s a ‘live’ training webinar this Thursday, March 27th at Noon or 9:00 pm ET.

If GOOGLE, the NSA, and Steve Jobs all got together in a room with the task of building a tremendously accurate trading algorithm… it wouldn’t just be any ordinary system… it’d be the greatest trading algorithm in the world.

Well, I hate to break it to you though… they never got around to building it, but my friends at Market Tamer did.

Follow this link to register for their training webinar where they’ll demonstrate the tested and proven Algorithm powered by the same technological principles that have made GOOGLE the #1 search engine on the planet!

And get this…had you done nothing b...



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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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About Ilene:

Ilene is editor and affiliate program coordinator for PSW. She manages the site market shadows, archives, more. Contact Ilene to learn about our affiliate and content sharing programs.

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