Market Update 11/07/2013

The SuperIndex has jumped smartly this week from mostly positive data from eLEI and the ISM report. However growth in ETI, GDP and Initial claims has slowed. A few months back on this radio interview we forecast there would be no “Summer Swoon” for the monthly leading data as with the three prior summers. With this new high SuperIndex print, we can put that one to bed.
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Although the visual upward trend on the monthly leading indicators is obvious, we are seeing worrying signs in the more timely weekly leading data. We expressed this concern a few weeks back in “Don’t count on Fed tapering any time soon” and so far things have continued to get worse as expected, albeit a small attempt this week at a bounce by the TBILL/BAA composite and the Corporate Bonds composite:
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It remains to be seen if this is an enduring bounce or a small pause. For now the diffusion still shows 30% of the underlying indicators in recession territory. As you can see, “short term spikes” are not common for the diffusion and “usually” warn of a down-trend. Of course, the blogosphere is littered with well-respected individuals having underestimated this economy and the stock market and we’re certainly not chomping at the bit to join that club, so we will stay long as the various models are telling us and give the economy the benefit of the doubt until we see more significant deterioration.
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Normally the above chart would not be any cause for concern, but the high correlation between MBS (shifted forward 12 months) and the WLIr coupled with a fact that this alignment on 13 June 2013 sat on a significant peak, has us twitchy. There is an interesting article on Bloomberg “Fed Says a Few Dealers Report Deterioration in MBS Market“, which when looking at the MBS growth below, appeared to us as a bit of an understatement.

MBS is “Treasury and Agency Securities: Mortgage-Backed Securities (MBS)” taken from the “H.8 Assets and Liabilities of Commercial Banks in the United States ” release of the Board of Governors of the Federal Reserve System.

For those following the SP500 Market Timing Project, it seems we got off to a goods start, but volatility lies ahead so do not expect this run to continue in a straight line. The model is a medium term trender and is happy to carry the odd small draw-down here and there in order to achieve its ultimate objective.
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About Dwaine Van Vuuren

Dwaine has a Bachelor of Science honors degree and is a full-time trader and investor. His passion for numbers and keen research & analytic ability has helped grow RecessionALERT into a company used by hundreds of hedge funds, brokerage firms and financial advisers around the world.

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