Market Breadth: With this past week’s market decline, our Bull/Bear Point and Figure Ratio at 0.70 rose from 0.51 last week, advancing within bearish territory. The total count of securities in bullish or bearish patterns increased fractionally to 2693. The count of bearish stocks decreased 10%, while the count of stocks in bullish patterns increased 22%. The Sand 2 Pirls P&F Market Breadth Summary Chart shows us a market now ten weeks in bearish territory. Paid subscribers have access to the OpenOffice Calc data from which the chart is generated.
The well known market breadth indicator, the NASDAQ McClellan Summation Index (NASI) fell 85 points for the fourteenth decline in 25 weeks. At a negative 87.82 points, it continues below all nine tops in the last 30 months, and continues above all five bottoms below -100 in the last 30 months.
Volume Analysis: In this week’s volume analysis, the NASDAQ Composite Index ended in Distribution mode with average daily volume lower than the prior week. In the last two weeks the NASDAQ had one (1) Accumulation day and three (3) Distribution days. (Accumulation days are counted when the index closes up on higher volume than the prior day while Distribution days occur when the index closes down on volume higher than the prior market day.) Last week, the NASDAQ ended in Accumulation mode on higher average daily volume.
Momentum: The CCI(20) at -84.02 is up from -120.31 last week. At Monday 3/26 close, it had 6 days below zero for a change of Woodie’s direction to Down. It came close at Thursday 4/5 close, but has not yet penetrated the +/-50 range for a valid ZLR (Zero Line Reject) Short entry signal.
In Woodie’s CCI trading system, six consecutive bars above or below zero are required for a change of trend. The Weekly CCI(20) of the NASDAQ Composite Index began a Woodie’s up trend one hundred and one weeks ago, while the Daily CCI(20) began a Woodie’s down trend one week ago.
The CCI(20) weekly declined to -62.16 from -12.41 last week, falling outside the +/-50 range required for a ZLR Long entry signal.
Industry Rotation the last two weeks: All of thetop five industries are positive and all of the bottom five are negative. Summary: REITs, Oil, and Brokers on top; Some Tech and S&P Retail on the bottom. Bullish: REITs continues in the top five. Brokers has entered the top five. Networkers has left the bottom five. KBW Bank and Comp Tech, have left the bottom five. Gold & Silver has left the top five. Bearish: Oil continues in the top five. Semis PHLX, Disk Drives, and Computer Hardware continue in the bottom five.
Two weeks ago, we reported that according to the latest Bank of America Fund Manager Survey, no less than 74% of respondents answered that the global economy is in “late cycle:” the highest percentage in survey history, while at the same time respondents voiced the highest inflation expectations in over 13 years. As a reminder, when global growth turns south coupled with inflation you get “stagflation”, and when the result is an abrupt halt to the “late cycle” economic expansion, recessions begins.
It is therefore not surprising, that with a record number of people convinced – and the market now too – that a recession may be imminent, that Morgan Stanley picked the topic of where in the economic cycle we are for its “Sunday Start” piece on what’s next in global macro.
As the bank’s global co-head of economics, Chetan Ahya, writes this morning, while in 2017, “the global economy roared back to life, as a synchronous recovery in developed (DM) and emerging (EM) markets propelled growth to a 3.7% annual average” this is now decidedly over, having reversed rapidly in 1Q18, “as DM growth has moderated alongside the rising risk of protectionism, renewing concerns over the length of the global expansion cycle.” In fact, as we showed last week, the global economic surprise index just turned negative for the first time since July 2017.
And, as Ahya adds, the far “more critical debate, in my view, is how long the business cycle has to run.” This is what the Morgan Stanley economist found:
The US and Japan are the primary drivers of the slippage in DM growth. Our US economics team has noted that “residual seasonality” consistently distorts GDP, leading to weak 1Q growth. In Japan, colder weather has dampened private consumption in 1Q18. In Europe, despite moderating PMIs, 1Q18 growth is tracking at an annualized 2.5%Q. In China, our tracking estimate for 1Q18 is now 6.9%Y vs. our initial forecast of 6.6%Y. Our tracking estimate for 1Q18 global GDP growth has drifted lower but still stands at a 3.9%Q SAAR. Cyclically, while we expect China’s growth to moderate, we see DM bouncing back in 2Q, which along with continued strength in emerging markets ex China should keep global growth well supported for the rest of the year.
Here Morgan Stanley shares a broader perspective on recent events, and whether “the business cycle in DM is coming to an end.” Repeating that the current cycle is clearly more advanced in DM, and the US is furthest along – hence, where attention has (rightly) focused, the bank’s global economic lays out the key parameters it is watching to see if the end of the business cycle is approaching. According to Ahya, the following conditions would be warning signs:
Resources are stretched. The unemployment rate is very low and wage growth is at cyclical highs.
Inflation rises slightly above the central banks’ 2% goal.
The investment cycle is becoming stretched, while corporate profitability is deteriorating.
The private sector is leveraging aggressively, and excesses are building.
Central banks take real rates into restrictive territory, slowing demand and causing defaults. This is the piece of the puzzle that brings the business cycle to an end.
So where does the US stand in the context of these 5 signs? Here is Morgan Stanley’s take:
Unemployment gap in negative territory, but no significant wage pressures yet
Inflation – heading towards but not overshooting central bank goals
Corporate sector profitability improving; capex cycle still not stretched
Aggregate private sector leverage not that aggressive
Real rates not yet in restrictive territory
Needless to say, all these are subjective metrics, and if one had to pick one market-based factor, we would go back to the striking finding by JPMorgan which we noted yesterday, according to which the market is now pricing in just 2 years before either i) the Fed engages in a policy mistake or ii) the Fed’s end of cycle dynamics are unleashed, leading to a rate cut and eventually, QE.
Morgan Stanley’s conclusion? “we recommend that you keep your seat belts fastened.“