Chart of U.S. Leading Index Looks Potentially Problematic for the Economy and Market: Analysis of U.S. Economy and Industry Indexes (Part 1)

This post was originally on the Dvolatility Research blog on 8/21/2014.

I'm going to first provide an update on the U.S. economy and then chart out some major industry indexes to see if there any warning signals or bearish divergences out there. The current bull market is about 5.5 years old, which is 44% above the average bull market duration of 3.8 years since the Great Depression (chart at Forbes). There also hasn't been a 10% correction in three years! So it’s time to keep a close eye on potential catalysts that could reprice market risk again even after the recent sell-off, which was mainly based on exhaustion (live market exhaustion indicators).

Economic Indicators

In the first chart courtesy of ycharts, you can see that US Initial Claims for Unemployment Insurance pierced through its 2006 low of 282k recently (hit 279k), but it's still very volatile around the 300k level (hit 298k today). The US 4-Week Moving Average of Initial Claims is right around the 2006 low as well (currently at 300,750). So the employment picture looks ok at the moment, but watch initial claims data closely as a forward looking indicator for the overall employment picture, economy and stock market (initial claims move inversely with the stock market, see a live interactive chart).

US Housing Starts and US New Housing Permits (seasonally adjusted annual rates) haven't broken down yet. According to Tuesday's report, housing starts rose to 1.093M and housing permits rose to 1.052M in July, which both beat expectations. It's still old data though, which is why I think putting these trends up against housing equity indexes will provide a better outlook for housing and the economy. US Retail Sales and US Light Vehicle Sales are still trending up as well, but, again, I'd rather take cues from equity indexes in real-time, which I will analyze on my next post.

Source: Ycharts.com

In the second chart, the ISM Purchasing Managers Index (PMI) rose to 57.10 in July from 55.30 in June and has been trending up since January 2014; the Philly Fed Manufacturing Activity Index rose to 28.00 in August from 23.90 in July and has been trending up since February when it went negative; the Empire State Manufacturing General Business Conditions Index plunged to 14.69 in August from 25.60 in July; but, to counter that, the Empire State Manufacturing Future General Conditions Index (green) spiked to 46.76 in August from 28.47 in July. So overall, manufacturing still looks ok at the moment.

Source: Ycharts.com

In the third chart, I looked at the Chicago Fed Midwest Economy Index and Chicago Fed National Activity Index. They aren't officially trending down yet, but the Chicago Fed National Activity Index has been trending down since March (it is volatile). Both of these indicators predicted the 2007-2009 recession when they trended down in tandem in 2007, and the National Activity Index led the way.

Source: Ycharts.com

Lastly, I looked at the Philly Fed U.S. Leading Index and ECRI U.S. Weekly Leading Index. The Philly Fed Index signaled the previous recession better than ECRI's Weekly Index, but the Philly Fed Index has a one month lag. It looks like the ECRI U.S. Weekly Leading Index is starting to roll over after its massive two year run. Keep an eye on it. If the downtrend persists, prepare accordingly for economic and market weakness ahead, in my opinion. Since the ECRI U.S. Weekly Leading Index has been rising in tandem with the stock market for over two years straight, if it breaks down here and plunges, I think it will be a huge red flag for the stock market and economy. In the last chart, I put up a logarithmic chart of the ECRI US Weekly Leading Index versus the S&P 500.

Source: Ycharts.com

Source: Ycharts.com

I also think that the stock market is still exhausted at the moment, and possibly on a cyclical basis.

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