About Me

Retired chief investment officer and former NYSE firm partner with 40 years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Monday, May 07, 2012

Weekly Cyclical Fundamental Indicator (WCFI)

During the current recovery, the WCFI has been the most reliable fundamental indicator of stock
market direction and momentum. It does not always work that way, but it has this time out.
The indicator has a purely economic coincident measure which is comprised of a broad array
of weekly data mostly from retail sales and production. This measure has grown in reliability
over the years because US companies have the capability to manage inventories and procurement
far more tightly. The WCFI also includes more economically forward looking measures, with
jobless claims and sensitive materials prices each receiving very large weightings.

The SP 500 (SPX) is trading just a wee bit higher than it was at the end of April, 2011. It is
important to note that the same can be said of the WCFI. Looking nearly yr/yr in this way, the
retail and production components of the indicator are are modestly higher and would be much
stronger yet if the construction materials businesses were not still so depressed. Jobless claims
are in far better shape than a year ago, a very nice positive. The nasty one has been industrial
commodities prices. This index (JOC) is down more than 13% from the 4/11 cyclical peak
and is trading even slightly below the peak levels of 2010. Since investors and traders use
sensitive materials prices as a proxy for cyclical economic momentum just ahead, the weakness
in these various industrial input components has kept players on guard.

It is also important to note that in both 2010 and 2011, cycle pressure gauges such as the global
PMI made peaks in the spring at levels just slightly higher than the current reading (Global PMI)
The PMI link also shows a loss of global economic growth momentum in the wake of the
peak readings, action which was foretold by the turns to weakness for industrial commodities
prices. JOC index via Bloomberg

The creation of industrial commodities ETFs and ETNs allows investors and traders to play
in these markets in addition to the large commercial firms and brokers. The partial
financialization of these markets by players who are already trading stocks, bonds and currencies
gives us windows on intelligence about the markets at work and the money down on the table.
It may also add to the extraordinary price volatility we have seen in many sensitive materials
prices in recent years.

The evidence so far in this cycle shows acute awareness about weekly economic data by
capital markets players with special focus on both the range of sensitive materials prices and
the level and direction of US jobless claims. It suggests that if US stocks are to end the year
significantly higher than now, jobless claims will need to fall a fair bit further and industrial
commodities prices will need to recover perhaps to reach new highs for the global recovery
cycle to date. Thus it may be that you will have some useful short term market intelligence as
the year wears on.

No comments: