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Tuesday, September 2, 2014

Seeking Alpha - The 3 Best Indicators To Track Global Stocks

The 3 Best Indicators To Track Global Stocks

Thu, Aug 28 | by Zacks Investment Research

As Zacks' new Chief Equity Strategist, I wrote a piece titled "The Only Investment Indicator You Need" for the 2012 Weekend Wisdom series.

My thesis was: "Keep it simple." Making money boils down to mastering one topic. You must correctly size up "big picture" macro risks that hit stocks hard at times. What was that sole indicator? Monthly U.S. jobs reports. This follow-on short is "The 3 Best Indicators to Track Global Stocks".This complements the 2012 insight. It doesn't replace it. Monthly U.S. jobs reports are the MOST important data to stay bullish (or get bearish). First: Track consumers.

Global Indicator One: Consumption Growth

Hedge Fund Research Inc. (HFRI), based in Chicago, produces over 100 indices. To know where smart money makes returns, consult this data. Table 1 shows that consumer growth beat the runner-ups of corporate profits and the unemployment rate (one period ahead) easily. If the U.S. consumer is on, global demand gets a leg up.

Time for a brief statistics lesson: A correlation number in Table 1 that gets toward 1 is a positive one-for-one returns relationship. A correlation that gets towards -1 is a negative one-for-one relationship. Zero correlation signals no relationship.

Table 2 shows U.S. consumption growth has a tight fit to U.S. returns earned by equity market neutral hedge funds. Outside the U.S., Emerging Market style hedge funds show U.S. consumer activity matters too, but not as strongly.

Global Indicator Two: Bank of England (BoE) Minutes

After consumers, we looked into the role GDP growth played in generating returns.It's a 3-month macro forward look that matters most to hedge fund investors... and to you! If you want a complementary take on matters outside the U.S., consult the U.K. authorities. That means getting a hold of the Bank of England (BoE) minutes.

I pulled this excerpt: "The recent trend of activity growth in the United Kingdom at or slightly above longer-term averages had continued, and sustained economic momentum was looking more assured." -- July 2014 sub-section on Money, Credit, Demand and Output.

BoE policy stayed the course. Stick to your guns. The BoE says the global bull market is on track. That takes us to a final indicator: Markit Purchasing Manager Indices (PMIs).

Global Indicator Three: Markit PMIs

According to Markit's website, PMI data are based on monthly surveys of carefully selected companies. These provide an advance indication of what is really happening in the private sector economy by tracking variables such as output, new orders, stock levels, employment and prices across the manufacturing, construction, retail and service sectors.

"During the depths of the recession, the headline PMI figure for the dominant service sector ... was a key indicator to highlight the impending severity of the recession in the immediate aftermath of the collapse of Lehman Brothers in late 2008. The PMI has also been very quick off the mark in heralding recovery." -- GrĂ¡inne Gilmore, The Times, January 2010

That sums it up.

Summing Up the Global Landscape

To sum up the state of any global landscape, check the indicators.

• First, July U.S. jobs came in at +218K. That's well above +150K needed to beat U.S. population growth. Check.

• Second, U.S. GDP grew +4.0% in Q2. Consumption growth was +2.5% of that. Consumer growth above +2% is solid. Long bias hedge fund returns are up. Check.

• Third, the Bank of England said activity indicators were 'slightly above' long-term trends. That's positive language for stocks. Check.

• Fourth, the composite eurozone PMI trend is up. The May 2014 Eurozone composite PMI was 52.2. June was 52.8. July was 53.8. The trend is up and indicates expansion. Worry comes via turns in Italy, Germany, and France PMIs. China's PMI is in expansion territory. Ditto for Japan and the U.S. and many others. Check.

My conclusions? I don't detect worry this month outside of Europe. Sleep soundly. All indicators say it is mostly a global bull market. Overweight stocks with a yellow flag on Europe. C'est finit? No! Keep vigilant. To catch turns in data, a global investor must rinse and repeat each month.

  • xpan
    Aug 28 05:43 PM
    Charts would be a lot more persuasive.
  • Diego Montalbon, raconteur
    Aug 28 08:50 PM
    Zacks says : 

    "Table 2 shows U.S. consumption growth has a tight fit to U.S. returns earned by equity market neutral hedge funds."

    What do market neutral strategies have to do with tracking global stocks ?
    Don't 'market neutral' strategies make 'tracking global stocks' irrelevant ?
  • versangitorix
    Aug 29 07:15 PM
    Sorry, but more to the point, what does positive US consumption growth have to do with positive returns earned by equity market "neutral" hedge funds??? Does this seem to imply that such funds are positively levered to consumer-type stocks (e.g., consumer discretionaries) and perhaps neutral or short other sectors? I don't get the implied 'correlation'.
  • jj1937
    Aug 28 09:54 PM
    1. Tavurvur
    2. Bardarbunga
    3. Ukraine
  • Pompano Frog
    Aug 29 12:13 PM

    Thanks for enlightening me. I was not familiar with 1 and 2 and had to google.

    I disagree with every point made in this article. I don't think there is the slightest historical evidence to support a relationship with these indicators and future movements in equity prices.

    I have run the PMI's for several countries and found the regressions were inverted. If you lag the PMI behind the equity markets you get a higher R2 than the other way around. Think about it.

    The consumer? Where was the consumer in March, 2009? Think about it. This is what you tell high school students in an economics class.
  • jj1937
    Aug 29 02:16 PM
    Perhaps 3 should be revised to Novorossiya and whether NATO adopts Ukraine this weekend.
  • Pompano Frog
    Aug 29 05:34 PM

    I do not have a great record of forecasting what politicians will do? I couldn't believe they would allow Lehman to fail. I thought it was just talk for the uninformed.

    The same here. The west encouraged the Hungarians to revolt and we let them be slaughtered. No one could repeat the same mistake twice.

    We encouraged Ukraine to tilt West. We guaranteed their borders and they dismantled their nuclear capabilities. We are the worst. If I was advising the Saudis I would be pressing them to nuke up or risk being destroyed. This is another example where academic intellectuals have the facts but somehow the environment or their personalities impinge on their decision making abilities.

    I am over generalizing. But, this is upsetting. We stand for nothing.
  • jyard01
    Aug 29 01:42 PM
    I have been closely following metric #3, the Markit PMI returns , for over a year.
    I feel that the PMI's have an inbreed optimistic bias. The good news is that they are very timely; the bad news is that the strength of the trend shown tends to be exaggerated. For example , in Italy the last 6 months they have shown a progressive economic rebound. In fact, there was a very weak non-recovery , followed by a relapse into recession.
  • Green Elmo
    Aug 29 10:35 PM
    Zacks, did your global macroeconomic indicators predict continuing low interest rates in 2014?

    I don't think so.
  • bbro
    Aug 30 09:49 AM
    I track 16 indicators that wither lead or coincide when a recession starts.15 of the 16 are positive for continued growth in the US economy. One is negative and it turned 2 days ago...the Euro 18 Economic Sentiment Indicator.

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Seeking Alpha - Is This Bull Market Real?

Is This Bull Market Real? by Roger Nusbaum


  • Every once in a while you might hear a reference to the gains made during the internet bubble as not having been real.
  • Being prepared for the next bear market, keep in mind this has nothing to do with trying to predict when it will occur, has two meanings.
  • How much risk are you taking in the income portion of your portfolio?

This week's Barron's had some great quotes, a couple of which we covered in our weekly market update.

The first one was in the Up and Down Wall Street column as follows;

Central bank largess rather than economic growth has buoyed asset prices.

This relates to a quote from John Mauldin a couple of weeks ago;

The measure is the surplus of money that is not absorbed by the real economy. The term is named after the great English economist Alfred Marshall. When the money supply is growing faster than nominal GDP, then excess liquidity tends to flow to financial assets. However, if the money supply is growing more slowly than nominal GDP, then the real economy absorbs more available liquidity. That's one reason why stocks go up so much when the economy is weak but the money supply is rising.

The idea with these quotes is to create, or reiterate, some context to what has been going on with equities during this bull market.

Every once in a while you might hear a reference to the gains made during the internet bubble as not having been real; obviously many of those gains were quickly wiped out. Given the Fed's heavy hand in markets for the last six years and the huge gains in equities, it seems likely that people will look back on this now 65 month old bull market as not being real.

It will be real to the people who take steps to protect their gains. Anyone who did not panic out in 2008 has reasonably gone along for the ride to some degree but as we saw unfold in 2008 people somehow forgot that the market occasionally goes down a lot (bear market), they react like it has never happened before and are unprepared.

Being prepared for the next bear market, keep in mind this has nothing to do with trying to predict when it will occur, has two meanings. One is emotional which is that as sure as you are reading this there will be another bear market at some point, it will scare the hell out of people, then it will make a low and eventually come back to make a new high despite it somehow being different than all other bear markets before it. Coming back may take years, or not, but it will recover. The great recession was different but followed that exact pattern and as obvious as it sounds now I promise you people will detach from this reality when it happens, but the way to avoid that happening to you is to understand how it works, now, while markets are at a high and fear is not part of the equation.

The other meaning is strategic. First figure out whether or not it is suitable for you to take defensive action with your portfolio (for me it is suitable) and then figure out the right way to do it (I prefer relying on the S&P 500's 200 day moving average) and then sticking to it. That last one is the toughest one for the reason we talked about above. People often come emotionally unglued in the face of declines. In the past I've talked about a former client who worried a lot about every decline and invariably the conversation ended with my reminding him that he'd been through more declines than I had.

The other quote to mention comes from Tad Rivelle of TCW who said;

At some point, we are going to be living with significantly higher rates than we have today. Fed policy is suppressing rates. That, in fact, is the whole point of zero rates or quantitative easing. As a consequence, market forces aren't able to express themselves fairly and properly in the interest-rate market. We do not believe that what the Fed is doing is ultimately going to take us to a better place, so we've reined in the portfolio's duration over several years, and we are defensive when it comes to corporate bonds and high-yield securities.

How much risk are you taking in the income portion of your portfolio? The answer to that question is less important than whether or not you know how much risk you are taking. There's nothing wrong with loading up on volatility and risk as long as you know you're doing it.

There is no way to know whether there will be severe consequence as implied in the above quotes but whenever the next really big decline comes for stocks and/or bonds we know certain things; people will overreact and panic because of how different it will be. Take the time now to do what you need to avoid being part of that group.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: To the extent that this content includes references to securities, those references do not constitute an offer or solicitation to buy, sell or hold such security. AdvisorShares is a sponsor of actively managed exchange-traded funds (ETFs) and holds positions in all of its ETFs. This document should not be considered investment advice and the information contain within should not be relied upon in assessing whether or not to invest in any products mentioned. Investment in securities carries a high degree of risk which may result in investors losing all of their invested capital. Please keep in mind that a company's past financial performance, including the performance of its share price, does not guarantee future results. To learn more about the risks with actively managed ETFs visit our website AdvisorShares is an SEC registered RIA, which advises to actively managed exchange traded funds (Active ETFs). The article has been written by Roger Nusbaum, AdvisorShares ETF Strategist. We are not receiving compensation for this article, and have no business relationship with any company whose stock is mentioned in this article.

  • Ryan Buckley
    Aug 28 08:45 AM
    Great article, friend.
  • Ben Gee
    Aug 28 09:08 AM
    The real market is real, a real bubble.
  • jj1937
    Aug 28 10:08 AM
    Don't they ring a bell at the top? I can't hear the music. Bardarbunga!
  • David at Imperial Beach
    Aug 28 09:14 PM
    All is illusion. It's all smoke and mirrors and befuddlement brought to you courtesy of the magic of compounding inflation from your friendly neighborhood central bank. Investors who care enough to turn on their fog lamps and peer into the mist must constantly compare their paper returns to the appreciation of hard assets like precious metals and land. When they do so, they will find that paper asset returns are not all they're touted as.
  • tallguyz
    Aug 28 09:18 AM
    Thanks for one more warning, amidst hundreds if not thousands of them echoing around Wall Street, that the market might/will go down (sometime).

    You say "...figure out whether or not it is suitable for you to take defensive action with your portfolio (for me it is suitable)..."

    What 'defensive action(s)' do you recommend?
  • Investor7020
    Aug 28 10:26 AM
    To me it sounded like Mr. Nusbaum is telling readers to figure out the answer to the exact question you asked for themselves. But let's see, what would be the most obvious defensive actions:

    * If you have high-flying stocks that made you some big gains: sell them
    * If you bought mREITs, BDCs, MLPs, CEFs while chasing yield: sell them
    * If you hold long-duration fixed income, e.g. preferred stocks: sell them
    * If you hold junk bonds, junk bond funds, bank loan funds: immediately sell them; like right now drop what you're doing and sell them
  • Praveen Chawla
    Aug 28 10:18 AM
    "What 'defensive action(s)' do you recommend?".
    Just common sense, prudence.
    Don't push your luck. Take some profit. Raise some cash. Dial back on margin. Don't get overly long.

    Its clear that the Fed is slowly taking the punch bowl away and its going to disappear rapidly over the next year or so. As for me - Last 5 years have been really, really good but now I am 5 years older and I really don't want to lose 50% of my net worth again (even temporarily), I can live with temporary 20% decline though.
  • aarc
    Aug 28 01:34 PM
    These are how the moving averages are most commonly used:

    - The daily 50ma is a favorite among Daytraders who prefer to hold positions for days to weeks;

    - The daily 200ma is a favorite among Swing Traders who prefer to hold positions for weeks to months;

    - Medium-term Traders prefer to use the weekly 50ma for holding positions for months to at least a few years;

    - The monthly 50ma or the weekly 200ma can be used by Long-Term Traders who prefer to hold positions for a few years to several years and/or for investors who prefer to hold positions for several years to at least a few decades.

    Which one are you?


    These are the more relevant moving averages for this 2+ year old Bull Run: 

    >> SnP500 Bullish vs. Bearish Views:

    >> Dow Jones Potential Running Correction:

    >> Compq Daily:

    >> Russell2000 Daily:

    SnP500 has been using the daily 100ma (not shown on chart) for more than a year now to support this bull run that started from the Fiscal Cliff Crisis of June 2012. Dow Jones has been using the daily 200ma since October 2013. Compq used the daily 200ema for the first time in April 2014; and Russell2000 broke below the daily 200ma in May 2014 but was able to recover since then. They were considered excellent entries by Swing Traders who prefer to trade the medium-term trend.


    Four major indexes; 4 different patterns that may proved contradictory to each other.

    Usually, when Dow Jones was contradictory against Nasdaq SnP500 would resolve the issue with either a strong rally or a vertical meltdown to synchronize them back on the short-term basis.

    This time around the Sector Rotations that started with Utilities, Home Builders, Real Estate, etc. that started in April 2013, further expanded starting March 2013 with the tech sectors such as Biotech and Social Media; greatly affected the four major indexes on the medium-term basis.

    << Sector Rotations have become popular since the 1990's to the 2000's. None of which resulted in a market correction but instead resulted in the marginal higher highs higher lows in the early 1990's and in the 2000's. Once the pressure of minor profit takings has been released; SnP500, like a compressed spring, rallied vertically for at least a few years (several years in the 1990's and 2006/07 in the 2000's) before another major crisis happened causing SnP500 to undergo a bear market correction.

    >> Thus, baring another major crisis such as the Russian Debt Crisis of 1998; 9/11 and Iraq/Afghanistan Wars, or Financial Crisis of the Century, or that of the EU Debt Crisis of 2011; SnP500 can go into another vertical rally if and when the institutional investors satiated their desire to take minor profits off different sectors.

    Basically, this bull run is now more than two years old from the Fiscal Cliff Crisis of 2012 that resulted in a correction of 10.90% and almost 3 years old from the EU Debt Crisis of 2011 wherein SnP500 went into a bear market correction of 21.53%.


    For the Medium- to Long-term:

    >> Long-Term Trend Investing Setup:

    >> Medium-Term Trend Trade:

    Those are among the highest probability trade/investment setups to date for those who would like to trend trade either the medium-term trend or the long-term trend (see my Comment of August 13 for detailed description of how the long-term Holy Grail worked during the secular rally of 1974 to 2000).

    My take:

    1.) For those who bought positions in previous years to early last year; it is not worth losing precious long-term positions based on short-term to medium-term crises and turmoils. Holding positions through thick and thin is far more important, on the long run, than trying to time the markets. 

    But then for many, capital protection is more important than the promise future profits thus, perhaps the monthly 50ma can be used as a last-resort stop loss for those who are already in-the-money but desire not to lose a portion of their capital.

    2.) For those who bought late last year or early this year; it was not practical to buy stocks/ETFs during the 'supposedly' last stages of a bull run. 

    A minor correction, if not a bear market correction, can happen at any time nobody can predict accurately. Thus, using trailing stops can be the better strategy to protect at least a portion of their paper profits and possibly for capital preservation. 

    However, IF (and only if) the Sector Rotations that started in April 2013 kept going on for years (such as what happened in March 2004 to July 2006 = 2 years 4 months with maximum drawdown of 8.77% in August 2004) kept happening in the months/years ahead; then it is not practical to use very tight trailing stops that can whipsaw majority of potential long-term positions. To date maximum drawdown was 7.53% in June 2013 for the SnP500.

    Also, if (and only if) the Dow Jones' Running Correction and/or SnP500's Sweig Breadth Thrust proved to be the right one; or if institutional investors suddenly decide to stop taking profits off their medium-term positions; and/or if no unpredictable major crisis actually happens in the near future; THEN, highest probability Dow Jones and SnP500 will undergo another vertical rally comparable to that of what happened in Noveber 2012 to May 2013 (= 7 months).

    That's my 'Balanced Approach' to these markets.
  • Praveen Chawla
    Aug 31 06:51 PM
    Good commentary. Hey, you should really write an article to elaborate on your points.
  • Paulo
    Aug 28 09:26 PM
    Risk can be reduced in the income portion of your portfolio by having bonds and equivalents in your own name as much as possible (I don't like bond funds) - but this may not suit financial advisors.
  • Trout L
    Aug 28 10:18 PM
    Here is what is real: revenue and net income at many companies. Take HD, which has been somewhat of a barometer for the crises and subsequent upswing. 

    Revenue for year ending 1/30/2010: 66.2 billion.
    Revenue for year ending 2/02/14: 78.8 billion.

    Those are actual consumers spending actual money. Add that growth to the fact that they are a much leaner company than they were in 2008-2009, and you get some nice profit growth as well. I suspect you would see a similar story at many blue chip companies.

    I'm not suggesting things haven't gotten a bit frothy out there with asset prices, but to suggest the whole thing is an illusion...
  • Chris Lau
    Aug 29 08:21 AM
    The rising tide raises all ships, so it's up to the prudent investor to know what lies underneath. In the VC world, Snapchat has an price of $10bn. Jessica Alba's pampers company has a value of $1bn. Event(s) will eventually lead to the end of easy money. Those who are cash flow positive and profitable will survive. Those propped by leverage and borrowing won't.
  • wretchedturkey
    Aug 29 09:35 AM
    Roger, perhaps you can define in better detail how to prepare for when 'the other shoe drops' or how to be prepared with 'defensive' stocks. 

    If it has already been discussed previously, can you direct me to such an article?

  • Roger Nusbaum
    Aug 30 10:00 AM
    Author's reply » To the extent you are interested, if you do a google search for random roger 200 dma you will probably find a couple of hundred blog posts
  • Hardog
    Aug 29 09:13 PM
    Roger 4 decades and this type of talk has come and gone. Nothing new, but for me DGI has been the panacea.
  • nestor7
    Aug 30 10:29 AM
    Is this rally real? Yes, it is, however, it will eventually end and I will bet real money that 4 out of 5 investors have no plan to protect profits when it does. In my view, it has been mostly share buybacks that have supported this rally. Certainly the case can be made that the economy has been far from robust, although several sectors have done reasonably well. True, cash is at all time highs, but many don't realize that company debts are equally at highs. Nothing will change even if the rally lasts another 5 years. In the end, the majority will surrender hard earned profits mainly because they are always bullish and seldom think in different terms. Real or not, the game is a mental conundrum to most and that is what makes the deck stacked in favor of the house, being those that provide the services, and the professional who has managed to control his emotions and take profits as they come. Like any casino, not that the markets are exactly the same thing, there can never be a time when the majority wins, at least to any significant degree.
  • Paulo
    Aug 31 06:35 PM
    Well, unlike the casino, it is not the case that you make your plays and 'rien ne va plus'.

    If the majority have structured their plays such that they must sell at the bottom (or have to sell anything at all at the bottom), that is certainly a problem (I mean, if your house falls in price, do you run out and sell it ?).

    A 20% (and sometimes more) correction is possible anytime. So what?? Nice to be perfectly hedged though, but that takes money and work (most of the time at minimum wage).

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