Friday, December 27, 2019

This Week's Message: The Thing Is

Hearing lots of chatter from the few current bears worth listening to about how sentiment indicators are screaming over-enthusiasm, how valuations are stretched, how we're experiencing a classic "blow off top", how "this is a terrible time to put money to work" and so on. And, yep, I sympathize, at least in terms of sentiment, as our own "Fear and Greed Index" confirms that this market is indeed over-ripe for a fall.

But here's the thing, there's a very distinct pattern that is simply demolishing the old technical and sentiment indicators of late; it's that the powers-that-be fully understand that when the market cracks the ballgame (the expansion) is likely over. I.e., even the slightest dips are met with comforting words from the Fed (to go along with huge money printing of late), the Treasury, and the White House itself (embodying a stock market-centricity the likes of which we've never seen), and traders bite, big time.

What short-term market players should be looking out for is the moment when a comment from the top ("phase 2 China deal going great", for example) meets a market dip that is not met with aggressive buying; i.e., when the market keeps on dipping despite all efforts to talk it back up -- that's a worry.

The rest of us should focus all of our attention beneath the noise, assessing the longer-term risk/reward setup and allocating our portfolios accordingly.

With the latter in mind, I just did the weekly scoring of our PWA Macro Index and, yes, it still reads red, but just barely. This week, -2.33, with just 2 data points adding, and 1 subtracting from the overall score.

The 2 new positives:  click to enlarge...

The Chicago Fed National Activity Index

The Atlanta Fed GDP Now Index

The 1 new negative:

Truck Tonnage

Among the 86 data points our index tracks 31% read positive, 34% negative and 35% read neutral.

While the relatively flat overall reading and distribution in terms of positive, negative and neutral suggest only a slight downside risk for the economy, a look at underlying trends and how they test historically has me more concerned than the score might otherwise suggest. 

Essentially, where we're seeing the greatest weakness is across the business space, where the negatives outpace the positives 2 to 1. While the strength continues to lie with the consumer; where 53% of our data points read neutral, with 47% positive. 

My concern lies in the fact that it's virtually always the business data that rolls over first, the consumer giving way later when weakening business conditions morph into expense (read jobs) cutting. 

While, indeed, the business data can improve and the stock market can once again make fundamental sense (doesn't now) without everything rolling over first, the thing is, this is how things will look ahead of when the next recession/bear market sets in; whether we're nearing it now, or sometime off in the future. 

In the meantime, we'll invest as conditions dictate...

Have a great weekend!

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