Wednesday, 6 June 2012

Big Macro Picture 2012 - Up to the Present Day

This article is designed to continue on from our previous post (Big Macro Picture 2011), just to get us up to speed before we start posting about the present day. To avoid repeating ourselves, it's worth checking out to see how we view markets on different timeframes, and categorise our analysis ("SHORT TERM", "MEDIUM TERM", and "LONG TERM", which come together to form the Big Macro Picture).

We'll cover the start of 2012 up until the round of data released on June 2nd. Hopefully it will continue to shed light on how we analyse market and economic trends, and give us some context for when we begin regularly posting.



The start of 2012. The S&P is around 1257 (where it started 2011). The Dow at 12217. The FTSE at 5572. The bull cycle is almost 3 years old, having begun in March 2009, the bottom of the bear market at the peak of the financial crisis.

Once again a Santa Claus rally has pushed the market higher - and in the opening days of 2012, here is how everything looks:

Our three independent categories of analysis line up as follows in January 2012:

LONG TERM - our year-to-year analysis, designed to identify bull and bear markets/economies, such as 2000-2002, 2003-2007, 2008-2009, 2009-present. Unchanged since mid-2009, when it became clear that a new bull cycle was beginning, the global economy and markets were recovering.

MEDIUM TERM - our month to month analysis, designed to identify trends lasting several months, such as March-October and October-January in our previous 2011 post. This indicator changes gradually over time, as leading market and economic indicators give us more clues to economic trends - something we aim to analyse at Big Macro Picture. This form of analysis slowly started to show positive signs from October to December 2011, where it continued in the early days of 2012.

SHORT TERM - designed to give us a guide as to important market levels and trends, using technical and market analysis. The outlook given by this type of analysis can change from day to day or week to week - but most importantly, is a guide to give us context rather than instructions of what to buy or sell.


Our MEDIUM TERM analysis for 2012 begins as a continuation of the trend from late 2011 - a recovery in the leading economic and market indicators, after a particularly severe correction in the summer. On the graph above showing global PMI data, we can see that the latest data point for early January 2012 confirms the positive trend. The troughing and then recovery of these indicators marks reasons to be bullish in terms of the month-to-month cycle we're in.

The market's optimism is demonstrated by the BPNYA chart above. We are above the 20 week moving average which is pointing upwards, and we are yet to enter "overly optimistic" (overbought above 70+) levels, having troughed in October.

Looking at the chart for confirmation using SHORT TERM analysis, we can see on the S&P that we are above the Ichimoku Cloud and above the upwards-pointing Tenken-sen and Kijun-sen (check out Youtube for explanations on Ichimoku chart analysis - it's very helpful for identifying market trends and important levels). We have seemingly beaten the 200MA and need to make an attempt on the previous swing high (1292). Overall, we have several reasons to believe we are in the middle of a MEDIUM TERM bull cycle within an overall LONG TERM bull market - giving us reason to have above-average exposure to risk assets.

We still approach our analysis in a cautionary way - attempting to "time the market" might not be impossible, but it is still prone to errors of judgment and timing. When our MEDIUM TERM signals start to indicate something, "scaling in" tentatively while we wait for gradual confirmation is often our wisest option, instead of boldly buying large quantities of shares in January 2009 or October 2011.

As January continues into February, the trend in leading indicators continues. This is how our indicators look after the February round of data (please note that at Big Macro Picture, we consider over 100 independent economic signals each month, and that this brief article only illustrates our points using a handful of them).

We can see that across numerous economies, the bullish month-to-month trend beginning in late 2011 has continued to post new "higher highs" as part of that trend in early February. The most resilient economy appears to be the United States - the least resilient, still indicating contractionary conditions despite improvement, appears to be the Eurozone. Having the choice of any major market at our disposal, at Big Macro Picture, at this stage we'd be looking to add exposure to US indices rather than Europe - while protecting against currency risks, suspecting the dollar might weaken in a risk-on environment.

Regardless, we are at least encouraged that the centre of global economic concern - Europe - shows signs of reversing the trends that threw equities markets into sharp declines in mid-2011.

This leads us up to the first major inflection point of the year in terms of Big Macro Picture's MEDIUM TERM economic analysis.


By late February the S&P had gained around 8% for 2012, with the FTSE at around 6% and the DAX up 13% (having rebounded strongly from a 15% loss in 2011). In the weaker European markets, the Italian MIB was up 9% (having lost 26% in 2011) and the Spanish IBEX was flat (after a 13% 2011 loss). While we can see the effects of a "flight to junk" associated with a bounce-back from severe declines, we still prefer to invest in the economies we deem stronger and more likely to outperform over time, in this case the US S&P.

The chart for the S&P along with the BPNYA are shown below for 2012 up until late February.

We can see that the market volatility of late 2011 has been replaced with a typically assured bullish channel in 2012. The BPNYA indicator remains above its 20 week moving average which is still pointing upwards. However, with the indicator now above 75, we note the risk that the majority of the move may be over. So long as the indicator has not peaked or fallen below 70 however, we know that the market could still continue higher for some time - and the indicator remains very bullish.

We reach February 22nd 2012 - when we receive our first cautionary signals from the leading economic indicators in 2012.

Several PMI figures were released for the Eurozone, and a great many of them fell beneath analyst expectations. French Services PMI, German Services PMI and German Manufacturing PMI all posted lower than expected figures, all lower than the previous month, failing to make new highs in their current trend. Japan Manufacturing PMI, Australian Manufacturing PMI, HSBC China PMI and then US ISM Manufacturing PMI then joined these indicators in failing to make new higher highs over the next week.

Please note that a great many other leading economic indicators continued to post higher highs at the same time - simply that the clarity of the late 2011-onwards cycle was becoming cloudier. This combined with the relatively overbought conditions on the bullish percentage charts, the eerily-low levels of volatility market by a low VIX and increasing concerns over rising petrol prices affecting confidence (political tensions in the middle east). From this point onwards, we begin issuing caution relating to adding more market exposure, and look for cheap ways to protect portfolios from downside or future volatility.


Whenever we start to see divergence between leading economic indicators and market sentiment, we start to pay more attention to our SHORT TERM analysis, as a guide for market momentum. We may become "less bullish" in terms of new positions added or increasing the % of portfolio in equities, but at this stage, the divergence is a suspicion rather than a sell signal. We still aim to have risk-on exposure to the strongest markets (in this case the US indices), but we're mindful of the cycle losing momentum, and don't wish chase greed-driven markets higher.

As we enter March then, we are scrutinising the other leading market and economic indicators for either confirmation or rejection of this "losing momentum" argument. It's worth pointing out that we do this entirely objectively - at Big Macro Picture we don't go looking for indicators to back up any particular story, we want an on-balance argument for and against the idea, to make the most effective investment decisions. We're especially interested in data surrounding the Eurozone, given this was the source of the weak data on February 22nd, and the centre of the weakness in 2011.

For purposes of brevity, we move on to the next round of data from March 22nd - the follow-up data from the previous month which began our more cautionary stance. Here is how the S&P and the bullish percentage indicator looked by late March.

We can see that the S&P isn't reflecting any of our concerns from late February, now up 7.5% for 2012. This isn't unusual - our indicators are designed to give us cautionary leads before a market has stopped making new trend highs - although this isn't always possible. While we are still happy to enjoy long exposure, we are mindful of the increasing risks of market over-optimism.

The March 22nd data confirms our cautionary stance - French Manufacturing PMI fell lower than expected back to contractionary levels, French Services PMI was worse than expected and failed to make a new trend high. German Manufacturing PMI fell into contractionary territory and made a new lower low on a seemingly new downward trend. The overall Eurozone Manufacturing PMI figure, still indicating contraction from 2011, also ticked lower than February.

This helps confirm our cautionary stance - that a new month-to-month MEDIUM TERM trend is forming, with Europe at the core of the worries. As in the previous year, this is compared with a relatively strong US economy - which by April shows no sign of following this new trend.

These periods in the market can often be the most difficult for us - where the market diverges from our indicators. There is no guarantee the indicators will not return to market-positive before the market itself reacts to the supposedly weakening conditions. Similarly, the timing of any expected decline can take days, weeks, or even months. At this stage, we still cannot have absolute conviction behind this new proposed cycle forming - and know that while market confidence is high, we shouldn't stand in its way. We continue to focus our long exposure to the most resilient market - the US, while potentially balancing this exposure with short exposure to certain parts of Europe.

We will be honest, these market periods can be difficult and dangerous - while we might take one course of action, it would be fair to say that simply "reducing market exposure" would be appropriate as well.

Gradually, as you can see, from February 22nd to the end of April, we have increasing reasons to be worried about the market - despite being positioned to enjoy the Dow and S&P making new highs.


The slow transition from bullishness at the start of 2012 to MEDIUM TERM bearishness was confirmed between late April and early May 2012. A combination of market over-optimism and divergence from leading economic indicators gave us cause for concern - but only by May could we say the market was beginning to reflect that divergence. Here is the BPNYA weekly chart from late April, along with both the S&P and Euro Stoxx 50:

Firstly we can see that the US indices have outperformed Europe considerably by late April, and hedging long US positions with bearish European ones has proven satisfactory up to late April. The BPNYA chart, and the evidence of momentum loss on the S&P chart (first neutral close of 2012 in April, MACD divergence), give us more reasons to be convinced of a new bearish MEDIUM TERM market cycle forming - in spite of the US economy holding relatively firm.

The leading economic indicators by late April/early May saw the ISM US Manufacturing PMI make a new trend high -  but the data at the source of our concerns for global equity markets, the core European economy, worsened once again to make new trend lows.

By this point, we have enough evidence to scale portfolios to be net short - or if we were long-only investors, we'd strongly consider exiting the market - with confirmation if the US indices (strongest markets) became technical shorts and broke the strong support at 1340. It simply would depend on the investor or trader in how they approached the markets at this point - more aggressive traders might have entered shorts as early as March. By mid-May, the BPNYA indicator and S&P look like this:

We can see it doesn't take long to get confirmation from the SHORT TERM analysis that the S&P has entered bearish territory. Note how early on in the cycle we got our first cautionary signals from the European economy, which went on to be the main drag on the markets in mid-2012. Attempting to go against the market in late February, which is also when the BPNYA peaks, proves reckless and impatient. The advantage of leading indicators is to get a head-start on the market, we must always be careful to be neither too early or too aggressive in how we use our analysis.

We are now very fast approaching the present day in our review of 2012 so far. We will finally summarise how the handful of indicators we've used for this exercise - covering 2011 and half of 2012 - look right in the present. Then, once we've completely given context to our overall Big Macro Picture analysis, we can start regular analysis via articles on this site, showing the various other leading indicators we like to use.


The S&P is at 1285, up around 2% for 2012. The Eurostoxx 50 is flat for 2012, while the CAC and FTSE are down around 5.5% and the Italian MIB is down 15%.

In our review starting January 2011 to June 2012, we have used a sample of leading indicators to illustrate how we view MEDIUM TERM trends and cycles in the markets. Here is how they look in the present day:

As we can see, the market has declined by over 8% on the S&P alone since our first signals to be "net short" in our portfolios, although the results differ depending how "convinced" we needed to be of the new trend forming. We had approximately 8 weeks warning prior to this to prepare for the possibility, showing how useful it can be to use MEDIUM TERM analysis of leading indicators while managing our portfolios.

As we bring our analysis up to the present day, we can see that the trends in the current cycle have continued. Conditions have worsened on the majority of our leading economic indicators, with the trend originating from and most pronounced in the Eurozone. The knock-on effect of this, and the presumably independent weakness in data from China, has now been reflected in market anxiety in both strong (US) and weak (European) stock markets.

We reach an interesting - and difficult - point in the cycle where the S&P has retraced to its 200 day moving average. This may act as a magnet in the short term, with expected volatility around it, making it difficult to advocate fresh positions until the market clearly bounces or falls through this level. We might expect the market to make several attempts to break the 200MA instead of falling through it cleanly - although this is purely a short term concern, and news/data should ultimately drive the direction.

Identifying that we are currently in a MEDIUM TERM bearish cycle is not a guarantee that the cycle will not end abruptly - and thus adding increasingly bearish exposure is not automatically our plan. Rationally, the more depressed equity prices become, the more dangerous it is to bet on that decline continuing. In later articles, we will probably discuss the investment options available to us during this kind of cycle. By paying attention to the SHORT TERM analysis - especially how the US indices perform around their 200 day MAs, we can adjust our exposure appropriately.


So our MEDIUM TERM analysis identifies cycles such as the one we anticipated in late February. Are we looking for signs to tell us when this cycle could lose momentum or end? In our regular day to day articles, we'll hopefully give on-balance arguments showing how each new piece of news or data affects our Big Macro Picture. Already by June 2012, we are looking forward at whether weaker oil/raw material prices and a more fairly priced Euro will start to show favourable effects before the end of the summer.

How about the LONG TERM view? We see each of our MEDIUM TERM cycles as month-to-month phases within LONG TERM bull and bear cycles. These we identify as 2000-2002, 2003-2007, 2008-2009, 2009-present.

Each MEDIUM TERM bearish cycle causes us to call into question whether or not we are on the cusp of a new LONG TERM bearish cycle. This cycle is no different - already many investors are questioning whether "we have another 2008 on our hands". As we mentioned in the 2011 article, there was only one time since 2009 when we seriously questioned the health of the LONG TERM trend - August-October 2011, when the US economy risked entering contraction.

Certainly there are many worrying signs for the health of the LONG TERM 2009-present cycle, mostly emanating from Europe. We've only used a limited handful of indicators in these two articles - but it's clear to see from the PMI charts above, the similarities between European conditions in 2008 and 2011-2012.

Most importantly though - it's very dangerous to assume the end of these cycles too early in the midst of a MEDIUM TERM bearish cycle. Doing so in late 2011 would for instance have been a grave mistake - with the S&P moving 25% to make new bull cycle highs. If we are already positioned for a MEDIUM TERM bear cycle, we don't need to be too aggressive and call for a new LONG TERM 2012-2014 bear market - because we would risk making inaccurate analysis and terrible investment decisions, if the economy returned to a bullish phase.

We are concerned for the current 2009-present cycle, and will continue to monitor the developments, but we're still some way off from a new bear market. Whether the US economy can decouple from Europe will play a large part in determining that - as well as monetary/fiscal measures taken by central banks/governments, the price of raw materials/oil, and whether activity in Europe benefits from a weaker Euro. We don't really like to speculate on how these factors will play their part - our only interest is what the data is telling us, and how it affects our investment activities. For now, as far as we're concerned, we're still in a 2009-present LONG TERM bull phase until the data explicitly indicates otherwise.


We hope to have shed some light on our analysis techniques for the SHORT, MEDIUM and LONG TERM categories.

Please note - it is always worth being wary of "retrospective analysis", especially in the world of investment. This article, and the 2011 review, are simply designed to give context and get readers familiar with our style of analysis. That way, when we start talking about MEDIUM TERM analysis of leading indicators, hopefully people will know what we mean, and what those indicators have done since 2010. The articles shouldn't be taken as anything other than a guide for our point of view - the real test will be the day to day analysis we make in our regular articles.

We look forward to discussing our investment strategies and philosophy in upcoming articles, as well as practical analysis of the market and economic conditions.

Please don't hesitate to contact us via the comments section or at:

Thanks for reading.


Mark A. Rogers
Big Macro Picture (founder)

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