February Reports: Is Not As Bad Good?

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Feb 27 2019

In this week's Weekly Insights:

-Share Market Momentum: 2x Indicators
-February Reports: Is Not As Bad Good?
-Yield: The Silent Performer
-Rudi On TV
-Rudi On Tour

By Rudi Filapek-Vandyck, Editor

Share Market Momentum: 2x Indicators

Two graphs included this week (see below) summarise, in my opinion, the background for today's equity markets.

The first graph concerns the leading indicator for the US economy, still the largest on this planet, as composed and published by the Conference Board, an independent research organisation with activities in 60 different countries.

As anyone can clearly see on that chart (which is updated until December), forward indicators for the US economic growth momentum pretty much fell off a cliff late last year, which easily explains as to why share prices went into a negative maelstrom at that time, fully exacerbating two full months of downward moving trend lines.

The graph specifically shows the leading indicator for the US, but the LEI for the rest of the world looks exactly the same. This feeds into the idea that a strong US economy can only withstand weakness in the rest of the world for so long. Eventually, and certainly history would back this conclusion, the US too will feel the impact from a slowing global economy.

The one caveat for all of this is that several input data for this indicator have remained missing due to the temporary US government shut down in December. The Conference Board might operate as an independent research entity, its indicators still rely on input data collected and published by departments of the US government. Since December, some of such data have not yet been released.

Also, as indicated (red arrows), the US LEI falling below the zero line historically always coincides with turmoil for global assets. In 2011 and 2012 the problem stemmed from a weakened and unstable Europe, by early 2016 investor doubt was focused on China with global momentum continuing to decelerate, and by late last year the culprit was more than likely a somewhat delusional Federal Reserve who somehow thought it could simply continue hiking the official cash rate, while running down the massive debt mountain on the central bank's balance sheet.

The world's most powerful central bankers have understood the market's message loud and clear since, and are now officially in pause mode.

This has facilitated strong rallies for beaten down equities the world around since. Which brings us to the second graph accompanying this story; CNN's Fear & Greed measure, observed by many across the globe who want a less technical indicator for where investor sentiment is at.

[With thanks to the Gartman Letter]

As clearly shown above, the indicator has ventured back into "extreme greed" territory, which is another way for saying shares have been egregiously overbought for the time being, or that market bullishness has once again reached elevated levels. None of this indicates a share market correction needs to follow immediately, but it does show the need for ongoing positive news flow to keep the upward momentum going, and probably shows a pull back, at the very least, needs to follow at some point, if only to let some steam escape from current share prices.

Investors might also take note that according to some technical analysts, like Gary Burton at FPMarkets, equity markets globally remain in a bear market. Viewed from this angle, the swift rally post Christmas into late February fits in the mould of sharp rallies that are typical under bear market conditions.

To throw off the mantle of the bear, the local ASX200 index needs to rally past the previous high, achieved in Q3 last year at 6373. I don't want to sound too pessimistic, but I don't see that happening in the foreseeable future. (though, admittedly, stranger things have happened in financial markets). But there is plenty of grey to play with.

Burton's latest market update suggests what equities need right now is a pullback of -5%, and then a resumption of this rally. Were this scenario to unfold in the weeks ahead, Burton would be prepared to once again call equities as being in an uptrend.

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