The Mega-Bear Quartet and L-Shaped "Recoveries"
by Chart School - March 12th, 2011 9:35 am
Courtesy of Doug Short
Note from dshort: I retired this chart series last summer in deference to my prefered inflation-adjusted series that aligns the S&P 500 2000 high with the Nikkei peak in 1989. However, I continue to receive requests for this version, despite the “V” shape of the the recovery since the March 2009 low.
This chart series overlays the current S&P 500 with the L-shaped “recoveries” after the Dow Crash of 1929, the Nikkei 225 after Japan’s 1989 bubble, and the post Tech Bubble NASDAQ. Click the chart below for a larger version and use the links to see various comparisons.
I’ve also included an updated two-decade inflation-adjusted chart, which gives us a fascinating visualization of the impact of inflation on long-term market prices. The higher the rate of inflation during a bear market, the greater the real decline. Compare, for example, the peak of the Dow rally in year seven with the same peak in the two-decade nominal chart. The difference is the result of deflation during the Great Depression.
It’s rather stunning to see the real (inflation-adjusted) decline of the Nikkei, two decades years after its crash. The recent lows rival the traumatic Dow bottom in 1932, less than 3 years after its peak.
These charts remind us that bear markets can last a long time. And it’s not necessary to go back to the Great Depression for an example.
| See also my preferred version, which puts the start of the current secular bear in 2000 with the popping of the Tech Bubble. In inflation-adjusted terms, the S&P 500 reached its all-time high in March 2000. Although the nominal high in October 2007 was higher, the “real” high was not. |
Note: These charts are not intended as a forecast but rather as a way to study the today’s market in relation to historic market cycles.
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The "Real" Mega-Bears
by Chart School - March 12th, 2011 9:35 am
Courtesy of Doug Short
It’s time again for the weekend update of our “Real” Mega-Bears, an inflation-adjusted overlay of three secular bear markets. It aligns the current S&P 500 from the top of the Tech Bubble in March 2000, the Dow in of 1929, and the Nikkei 225 from its 1989 bubble high.
This chart is consistent with my preference for real (inflation-adjusted) analysis of long-term market behavior. The nominal all-time high in the index occurred in October 2007, but when we adjust for inflation, the “real” all-time high for the S&P 500 occurred in March 2000.
Here is a nominal version to help clarify the impact of inflation and deflation, which varied significantly across these three markets.
Note: These charts are not intended as a forecast but rather as a way to study the today’s market in relation to historic market cycles.
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Michigan Consumer Sentiment Index Falls Sharply
by Chart School - March 12th, 2011 12:35 am
Courtesy of Doug Short
The University of Michigan Consumer Sentiment Index preliminary report for March came in at 68.2, down from 77.5 in February and a stunning reversal from the recent trend of improving sentiment. The Briefing.com consensus expectation had been for 76.5 and Briefing.com’s own forecast was for 78.0.
The survey’s measure of current economic conditions dropped to 83.6, from 86.9 the month before. Consumer expectations fell to 58.3 from 71.6, the lowest level since March 2009.
Consumer inflation expectation rose to 4.6 percent from 3.4 percent in February, the highest since August 2008. The 5-10-year inflation outlook rose to 3.2 percent from 2.9 percent. The increase in gasoline prices was no doubt a factor.
See the chart below for a long-term perspective on this widely watched index. Because the sentiment index has trended upward since its inception in 1978, I’ve added a linear regression to help understand the pattern of reversion to the trend. I’ve also highlighted recessions and included real GDP to help evaluate the Michigan Consumer Sentiment Index as an indicator of the broader economy.
To put today’s report into the larger historical context since its beginning in 1978, consumer sentiment is about 21% below the average reading (arithmetic mean), 20% below the geometric mean, and 22% below the regression line on the chart above. The current index level is at the 13th percentile of the 399 monthly data points in this series.
For the sake of comparison here is a chart of the Conference Board’s Consumer Confidence Index (monthly update here). The Conference Board Index is the more volatile of the two, but the general pattern and trend are remarkably similar to the Michigan Index.
And finally, the prevailing mood of the Michigan survey is also similar to the mood of small business owners, as captured by the NFIB Business Optimism Index (monthly update here).
Consumer and small business sentiment remains at or near levels associated with other recent recessions, but the trend has been one of strong improvement. We now must wonder if the latest Michigan reading foreshadows a reversal in other sentiment indicators.
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The ECRI Weekly Leading Growth Index Up Slightly
by Chart School - March 12th, 2011 12:35 am
Courtesy of Doug Short
The Published Record
The published ECRI WLI growth metric has had a respectable record for forecasting recessions and rebounds therefrom. The next chart shows the correlation between the WLI, GDP and recessions.
A significant decline in the WLI has been a leading indicator for six of the seven recessions since the 1960s. It lagged one recession (1981-1982) by nine weeks. The WLI did turned negative 17 times when no recession followed, but 14 of those declines were only slightly negative (-0.1 to -2.4) and most of them reversed after relatively brief periods.
Three other three negatives were deeper declines. The Crash of 1987 took the Index negative for 68 weeks with a trough of -6.8. The Financial Crisis of 1998, which included the collapse of Long Term Capital Management, took the Index negative for 23 weeks with a trough of -4.5.
The third significant negative came near the bottom of the bear market of 2000-2002, about nine months after the brief recession of 2001. At the time, the WLI seemed to be signaling a double-dip recession, but the economy and market accelerated in tandem in the spring of 2003, and a recession was avoided.
The Latest WLI Decline
The question had been whether the WLI decline that began the the Q4 of 2009 was a leading indicator of a recession. The published index has never dropped to the -11.0 level in July 2010 without the onset of a recession. The deepest decline without a recession onset was in the Crash of 1987, when the index slipped to -6.8. The ECRI managing director correctly predicted that we would avoid a double dip. The latest GDP for Q4 of 2010, revised down slightly to 2.8, confirms the ECRI stance.
The WLI Versus Other Macroeconomic Indicators
For additional perspective on the performance of this indicator, see Comparing the ECRI Weekly Leading Index with Two Key Competitors, which highlights the curious behavor of the WLI following the 2008 Financial Crisis.
The ECRI Weekly Leading Index appears to be more sensitive to upturns than either the Philly Fed’s ADS Business Conditions Index (ADS) or the Chicago Fed’s Current Activity Index.
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S&P 500 Over the Long Haul: Connecting the Dots
by Chart School - March 12th, 2011 12:35 am
Courtesy of Doug Short
Technical analyst Chris Kimble takes a long look at the S&P 500 and asks whether we’re at a major price point suggested by a resistance line that dates from the mid-1980s.
Chris comments: The 1987 highs and the 2002-2003 lows were important price points in history.
A key resistance line, drawn from these to key dates, is coming into play right now in the S&P 500 index.
Is this line the reason the index has been down of late? Too early to tell, yet worth watching!
For the most up-to-date Kimble analysis, check out Chris’s blog: Kimble Charting Solutions.
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S&P 500: Down for the Week, But Above 1300 and the 50-Day Moving Average
by Chart School - March 12th, 2011 12:35 am
Courtesy of Doug Short
The S&P 500 closed the day up 0.71% but the week down 1.28%. Today’s bounce, on weak volume, put the index back above its 50-day moving average and the symbolic 1300 level. The index is 92.8% above the March 9 2009 closing low, which puts it 16.7% below the nominal all-time high of October 2007.
For a better sense of how these declines figure into a larger historical context, here’s a long-term view of secular bull and bear markets in the S&P Composite since 1871.
For a bit of international flavor, here’s a chart series that includes an overlay of the S&P 500, the Dow Crash of 1929 and Great Depression, and the so-called L-shaped “recovery” of the Nikkei 225. I update these weekly.
These charts are not intended as a forecast but rather as a way to study the current market in relation to historic market cycles.
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Getting Technical: Weekend Update
by Chart School - March 12th, 2011 12:35 am
Courtesy of Doug Short
The S&P 500 broke a support this week but remains neutral, on 0.8% below-average volume and on falling but near-support momentum. A clear break of the EMA10 could suggest a gradual descent in the direction of the EMA40.
Note: For newcomers to technical analysis, here are brief explanations for the two key indicators that Serge features:
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Getting Technical: Weekend Update
by Chart School - March 11th, 2011 8:35 pm
Courtesy of Doug Short
The S&P 500 broke a support this week but remains neutral, on 0.8% below-average volume and on falling but near-support momentum. A clear break of the EMA10 could suggest a gradual descent in the direction of the EMA40.
Note: For newcomers to technical analysis, here are brief explanations for the two key indicators that Serge features:
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S&P 500: Down for the Week, But Above 1300 and the 50-Day Moving Average
by Chart School - March 11th, 2011 4:35 pm
Courtesy of Doug Short
The S&P 500 closed the day up 0.71% but the week down 1.28%. Today’s bounce, on weak volume, put the index back above its 50-day moving average and the symbolic 1300 level. The index is 92.8% above the March 9 2009 closing low, which puts it 16.7% below the nominal all-time high of October 2007.
For a better sense of how these declines figure into a larger historical context, here’s a long-term view of secular bull and bear markets in the S&P Composite since 1871.
For a bit of international flavor, here’s a chart series that includes an overlay of the S&P 500, the Dow Crash of 1929 and Great Depression, and the so-called L-shaped “recovery” of the Nikkei 225. I update these weekly.
These charts are not intended as a forecast but rather as a way to study the current market in relation to historic market cycles.
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New falling channels
by Chart School - March 11th, 2011 3:36 pm
Courtesy of Chris Kimble
CLICK ON CHART TO ENLARGE
New falling channels appear to be forming in the 4-pack above. Rallies should be expected inside of these channels. Key to these channels, can the top of the falling channel be taken out!
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