Our Readers know that this is a period of time where we are extremely concerned with US assets in general and the battle between Momentum investing which is taking US equities – or parts of them – to exceptional levels of overvaluation, and the macro-economic and fundamental background which, to us, is not conclusive of a renewed up cycle in US equities despite the extremely ample liquidity created by the FED.
In fact, many technical signals are flashing RED or ORANGE signals for the NYSE and the NASDAQ and are increasing in frequency as the days go by.
As always, technical signals can never be taken as 100 % reliable and in some occurrence they may shout “Wolf”, but one thing is sure and proven time after time and that is that these Signals have ALWAYS occurred prior to a major correction in equities.
We will be listing here the signals that worry us :
- HINDENBURG SIGNALS The Nasdaq exchange continues to see an abnormally large number of stocks hitting 52-week highs and 52-week lows. More than 3% of securities on the exchange have hit either extreme for a week straight. It is one of the conditions that has helped trigger a Hindenburg Omen for 4 straight sessions.
These clusters led to mostly poor medium-term returns for the Nasdaq. And it has been especially bad over the past 20 years. Relying on a single signal can be misleading, but this split in the Nasdaq has been consistent, and consistently bad, for decades, and it’s a hard piece of evidence to ignore.
- TITANIC SIGNALS Titanic signals are the same as the above save for the fact that they happen when the index has just recorded new all-time highs which makes the fat that a large proportion of stocks make new 52 weeks low at the same time worse.
- NYSE HINDENBURG. The NYSE has finally joined the Nasdaq in triggering a Hindenburg Omen yesterday. It’s the first one since August and the fact that the main index is now joining the split market just increases the sen that the Ice is breaking under the momentum market. There have been 203 Omens since 1965 and they have led to corrections almost 75 % of the time.
- SPX MOMENTUM The S&P 500 hasn’t closed below its 10-day moving average for 29 straight days, one of its longest-ever streaks. So far this year, more than 71% of days have closed above the 10-day average, one of the highest-momentum years since 1928.
The theme in August and September was a raft of data showing “irrational” pessimism from investors, with much of that fear being driven by poor economic reports that have mostly preceded gains for stocks. Now that stocks have recovered, the theme has shifted to signs of extreme optimism with technical warnings, battling against price momentum.
Through 224 trading days, the S&P has closed above its 10-day average 160 times, so 71.4% of the days were above average. That is remarkable. It’s one of the most short-term-momentum filled years in history.
However, when that happened, most of the time a mean to reversion took place and led to weaker markets.
- UNPRECEDENTED GAP BETWEEN PROFESSIONAL AND INDIVIDUAL INVESTORS
We highlighted this unusual gap between market perceptions several times in the past and they have ALWAYS led to a significant correction.
- INVERSION OF THE YIELD CURVE 2019 was marked by a strange phenomenon that does not happen all the time which usually heralds a recession ahead. Bond yields tend to invert with longer maturities yielding LESS than shorter maturities.
This DEFLATION SCARE that we warned about in OUR SEVEN INVESTMENT CALLS FOR 2019 is highly unusual as inflation numbers are not coming down as they should in a real deflation scares and for the first time in history, 10 year and 30 year REAL yields went into negative territory.
Every time this has happened in the past, equity markets fed sharply afterwards.
On the fundamental side, one of the most infringing factor is the ability of te US stock markets to make new highs in the face of declining corporate earnings and the general sentiment that the decline in earnings is a temporary phenomenon.
Unfortunately, this perception is not validates by experience and earnings recessions have never ended with only one quarter of declines.
Moreover, the decline in earnings growth has now started in Q4 2018 when the exceptional impact of the Tax cuts started to fade away and has now been declining for four quarters in a row with a significant decline in the last quarter of 2019.
Conversely, US equity indexes are today higher than they were at the peak of the US corporate earning growth in Q3 2018 and it is difficult to see what will underpin such optimism.
Granted, most commentators are pinning their hopes on a partial resolution of the Trade War, before the year-end. But its is doubtful that even a partial resolution of the Trade war will send the US economy flying and corporate earnings suddenly climbing.
In fact, leading indicators are pointing to a downward acceleration of the slowdown and CEO confidence, contrary to Wall Street, is plunging.
The disconnect between Wall Street and Main Street is not a new thing but usually, when Wall Street was optimistic, it pointed to a resumption of economic growth ahead that had not yet been received by Main Street.
The coming collapse in US economic growth
The latest indicators that makes us extremely worry is the The Federal Reserve Bank of Atlanta ‘s GDP NOW economic model that is suggesting a sharp slowdown in U.S. GDP growth for Q4 2019 .
Contrary to the consensus of economists that is expecting a 1.9 % growth in the 4th quarter of 2019, the Atlanta FED model predicts a
0.4 % growth this quarter.
THIS IS A MAJOR NEGATIVE THAT IS NOT YET FACTORED IN BY THE CURRENT OPTIMISM IN EQUITIES.
Latest forecast: 0.4 percent — November 19, 2019
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2019 is 0.4 percent on November 19, up from 0.3 percent on November 15. After this morning’s new residential construction report from the U.S. Census Bureau, the nowcast of fourth-quarter real residential investment growth increased from -2.3 percent to 0.5 percent.
The growth rate of real GDP measured by the U.S. Bureau of Economic Analysis (BEA) is a key metric of the pace of economic activity.
It is one of the four variables included in the economic projections of Federal Reserve Board members and Bank presidents for every other Federal Open Market Committee (FOMC) meeting.
As with many economic statistics, GDP estimates are released with a lag whose timing can be important for policymakers. In preparation for FOMC meetings, policymakers have the Fed Board staff projection of this “advance” estimate at their disposal.
These projections—available through 2008 at the Philadelphia Fed’s Real Time Data Center—have generally been more accurate than forecasts from simple statistical models.
The Atlanta Fed GDPNow model also mimics the methods used by the BEA to estimate real GDP growth. The GDPNow forecast is constructed by aggregating statistical model forecasts of 13 subcomponents that comprise GDP.
Other private forecasters use similar approaches to “nowcast” GDP growth. However, these forecasts are not updated more than once a month or quarter, are not publicly available, or do not have forecasts of the subcomponents of GDP that add “color” to the top-line number.
The Atlanta Fed GDPNow model fills these three voids.
As such, it has become one of the most precious and accurate indicator of real time activity in the US and is followed closely by the FED as well as by economists.
On October 24th 2019, only three weeks ago the GDPNOW model expected a US growth of 1.8 % for the 4th quarter of 2019.
The current collapse from 1.9 to 0.4 % is a worrying sign that may not have been integrated by the markets.
The data from the Atlanta FED Model is confirmed by the New York FED Model that arrives exactly at the same conclusions using different series of data.
The New York Fed’s Nowcast for fourth quarter GDP is now calling for growth of just 0.4%. That’s down from the model’s earlier projection for 0.7% growth. The NY Fed cited “negative surprises” in recent economic reports, including a fall in manufacturing production during October.
This is usually a sharply NEGATIVE development for the US Dollar
One of the main reasons explaining why equity markets have been powering ahead in October was the decision of the FED to lower interest rates on Oct 31st 2019. The chart below plots the behaviour of the SP500 and the level of the FED Funds
In a very unusual fashion the FED also decided to lower interest rates at a time where the US core inflation was rising, taking real interest rates from positive to negative.
Now surely, equity markets are betting that more liquidity will automatically translate in better economic growth and a recovery in corporate earnings.
But this may be very far from the reality as the GDP NOW indicator of the Atlanta FED seems to suggest.
Quite the contrary, the counter-intuitive decision of the FED to lower rates may well be driven by the data that is indicating a sharp slowdown ahead.
And what this may indicate is that the persistence of negative real rates, or even an increase in US negative real rates will force the US Dollar sharply Lower once investors realise that growth is NT coming back and that the FED will be put between a rock and a hard place with LOWER GROWTH AND HIGHER INFLATION
AS THE NEXT CHART SHOWS WE MAY BE COMING TO THE END OF THE LONG TERM US DOLLAR BULL MARKET IN PLACE SINCE 2008
The message is less clear on the DXY Index , but still shows that we are at a major resistance point in the upward trajectory of the US dollar against the major other currencies of the world
The sharp slowdown in US GDP is not yet factored in by equity markets at this stage
It probably heralds a structural change of trend in the direction of the US Currency Ain the months to come.
The trigger may come in the form of a currency pact as part of the US-China Trade War resolution.