Tuesday June 22, 2010

Where we stand : leading economic indicators, S&P 500, crude oil prices and the economy

The economic recovery looks good, and the job market hasn't been anywhere as booming in a long time, albeit apparently limited to certain sectors of the economy. Crude oil prices have risen and have been gone over the $78-79 level in the past few trading sessions, and pump prices have gone up in recent weeks. Hopes are high that the European crisis has been resolved, with the EUR/USD bouncing off recent lows. But perhaps that is all it has been - just a bounce. Taking a closer look, this is where we stand in terms of some of the leading indicators for the economy :

1. Some of the published Leading Economic Indicators (LEI) are now rolling over and heading down. An example of which is the ECRI WLI (Weekly Leading Index), above, a composite index of a number of leading indicators, that has been falling since it hit a peak on 30 Apr 2010 of 134.7, and now it is down to 122.5, a fall of 9.06%. See here for more information and click here for the raw data. Although, besides a few voices in the contrarian community, the mainstream economists are not quite ready to call it a double-dip recession just yet.

2. Crude oil looks just days away from technical confirmation of a Death Cross (50/200-dma downside crossover). Stochastics are in overbought territory, and running into considerable resistance at the 80 level. In hindsight, the $87 level now looks like an ominously powerful triple-top formation. We might actually be able to start drawing a massive down channel through the $67 level, heading for $60, but that might be getting a little ahead of things. For the moment, the level to watch out for is the convergence of the 50- and 200-dma around $77.

3. The S&P 500, or SPX for short as some of us refer to it, is seemingly pulling off a nice double-bottom up from the 1040 level. This contrasts, however, with two other potential technical formations. One of which is of course the Death Cross downside crossover which could a couple of weeks to a month or so to confirm. The other is a potential down channel which could result in a slide below 1000. Of course it's not a hard and fast rule like having 2 bearish technical indicators outnumber 1 bullish indicator or something silly like that, we'll have to see how it plays out over time.

4. And finally there is the Baltic Dry Index, or BDI for short. This is a favourite indicator for some folks, who point out to the way the index is constructed, being based on a composite of actual shipping rates for various commodities and cannot be easily gamed. Based on this, the 11793 high reached around May 2008, or about 2 years ago, seems like a life-time ago. Compare this to the more recent 4209 local high in May 2010 and you can easily surmise that the world economy has not quite recovered to half of where it was 2 years back. A point which probably rings true for many people. And now, the worse thing is that the BDI seems to have started falling off a cliff since May 2010, violating both the 50-day and 200-day moving averages on the downside. A couple more months of this and we might see the dreaded downside crossover.

All the above could be considered as leading indicators for the economy at large, and add to these other items like M3 money supply contracting 10%, flat consumer spending, and a slowdown in growth of business expenditure (second order differentials), it does look like the economy is about ready to roll over. The short-lived enthusiasm for the long-awaited Chinese yuan float might also be another warning sign. The Second L, or second downleg could be at hand. On the other side of the argument are those who point at the market momentum indicators, or the concident economic indicators, or the job situation (which is a lagging indicator as explained earlier). Watch for an interesting second half of 2010 as we see events play out and watch for the technical formations above to either confirm themselves or be negated by other factors. For now, it might be a good idea to seek safety in cash and cash-equivalents instead of taking on risk in the markets. The more intrepid traders among us might consider opening, or holding on to short positions. The timeframe for a further evaluation of the macro situation will be around the end of Q3 to Q4 2010.

See also :

1. Watch the Euro
2. NYMEX crude oil prices surge above $86 to 17-month high on economic recovery
3. NYMEX crude oil prices fall on Spain downgrade after hitting $75.72 intra-day
4. Job market / stock market outlook 2010
5. Watch China

(2010-06-22 22:23:13 SGT) [Biz] Permalink

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