Thursday, 28 June 2012

PRE-MARKET (June 29th 2012): Resolutions in Europe?


PRE-MARKET for US trading on June 29th 2012.

We're not really fans of politics here at Big Macro Picture - but we had to admire how the politics headlines affected the US markets on Thursday. First up was the Supreme Court, where President Obama's healthcare act survived in-tact, giving markets enough of a reason to sell off heavily in the morning. At one point the Dow tested the bottom range of our 12450-12467 target, down 175 points. Then, in the last half an hour of trade, markets rallied back to the 12600 mark, apparently on news that Chancellor Merkel had cancelled a press conference to work on a new solution for the European debt crisis.

And this morning, we wake up to news that the EU summit covered more ground than the market expected, and the US futures are indicating another +100 open for the DOW.

We're more focused on data rather than headlines in determining our views, but Thursday showed why it's important to keep perspective using SHORT TERM analysis, in order to avoid being caught up in the emotion of the market. A very pessimistic start to the day would have had us convinced that the market was beginning to further reflect the MEDIUM TERM weakness of the current trend - but by the end of the day, we were more impressed by the market's resilience. Identifying 12450-12467 (and 1310-1315 on S&P) as significant, we knew that the market would have to break this area convincingly to suggest conviction in any bearish move. Similarly, we know that above us on the S&P there is serious resistance between 1336-1345 before the previous swing highs can be tested - it will be interesting to see how today plays out for the US markets.

We can see how the market is fast approaching the Kumo projected in front of it - a test for the downward trend. If by July 10th the market is able to confidently break out beyond 12700, the US indices will cease to be technical shorts on the Daily chart.

While we recognise the resilience in the market - and understand there may be more underlying strength to come in US indices - it doesn't alter our MEDIUM TERM bearish stance (April-present), in the same way it doesn't alter our LONG TERM bullish stance (2009-present).
If the outcomes from the EU summit are a boost to European business conditions, when this is reflected in the data and with conviction in market breadth, we will be confident in declaring a new MEDIUM TERM bullish cycle. Until then, it is safe to say that adding long positions into this bullish move might be risky, unless simply hoping to ride short term momentum.


Today sees the release of 28 global economic indicators for inflation, employment and business activity. Out of these, seven we deem significant enough to factor into our Big Macro Picture view, although only two we consider particularly important, and one is only a revised figure.

The remaining significant leading economic indicator being released today is the Chicago PMI. The US regional surveys can often produce misleading results when used on their own, and can be fairly volatile. However, when used in tandem with other regions and the overall US PMI, we can get a real sense for developing trends in the United States economy.

As we can see, the MEDIUM TERM trend from March onwards is clearly down - as we often see in the summer months. The LONG TERM view is still positive (above 50 indicating expansion), but we want to know whether or not the current month-to-month trend is getting better or worse. For our MEDIUM TERM view, a reading higher than last month would show nice divergence from the current trend - while a lower reading, or a reading below 50, would be a real cause for concern.

The Richmond Manufacturing index dipped negative for the first time since November 2011 on Wednesday, and with other leading indicators deteriorating, it will be interesting to see how Chicago PMI holds up. It will certainly prove to be an interesting prelude to the ISM Manufacting PMI released on July 2nd, which we view as the most significant economic indicator for the global economy.


Note: If you're new to Big Macro Picture, check out how we look at the markets on different timeframes (LONG, MEDIUM and SHORT) to identify the different trends  that form our Big Macro Picture. Our review of leading economic data tends to help us get a lead on the month-to-month cycles of the market in the MEDIUM TERM category.

Yesterday saw the release of Weekly Unemployment Claims, Austrian PMI and European Retail PMI (one moderately useful and two relatively weak leading indicators, but relevant nontheless), as well as official US and UK GDP figures (both of course, lagging/confirmation indicators).

We view Final GDP figures in our rear-view mirrors as investors - by the time GDP stats are released, the market is already concerned with the next quarter. However, it's always interesting to note how GDP is developing each quarter - the trend, and performance against analyst expectations, can offer us insight into the LONG TERM cycle. With the UK dipping back into recession, and the US growth rate ticking back down to 1.9%, there are a few concerns over the health of that cycle -- although no strong evidence that this bull cycle is about to end. With next quarter in mind, given the detorioration of indicators since Q1, we have good reason to suspect Q2 GDP might continue that MEDIUM TERM downward trend.

Moving on to yesterday's leading indicators:

The US Weekly Jobless Claims number is a helpful indicator for MEDIUM TERM trends when used in the proper way. Firstly, being released every week, the overall trend is a useful barometer for trends in the US economy. The peaks, troughs and trends in the indicator can pick up on MEDIUM TERM soft patches in US economic activity - and in the LONG TERM, the trend clearly indicates whether the economy is in a bullish or bearish cycle.

As we can see above, the LONG TERM 2009-present trend is captured, and within that we can see numerous MEDIUM TERM trends. The latest, troughing at 348k in February/March, continues to trend generally higher compared to earlier this year, within the LONG TERM bullish trend. While we might expect this bearish MEDIUM TERM trend to reverse eventually, until it does, it only adds credence to our bearish thoughts on this timeframe.

With a reading of 386k this week, a bigger concern is that last week's number was revised up to 392k - joint highest reading since last December, with every likihood this week's reading will be revised higher also. No single figure can be taken too seriousy with this indicator - being an employment figure, it is more likely to lag than lead other indicators, and it is prone to producing highly anomalous individual points of data. But as you can see above, it has a useful place in our Big Macro Picture, and we expect the trend to turn positive before we declare a new overall MEDIUM TERM bull cycle.

In other news, two interesting data points were released from Europe, but neither play too significant a part in our analysis. Firstly European Retail PMI is a wild, volatile indicator. It is prone to producing misleading signals and anomalies, but the trend can often be useful to observe in building up our Big Macro Picture. The Italian component improved from a PMI of 35.8 to 41.7, the French component from 41.4 to 48.9 and the German component was 52.4, up from 50.7. The overall result was a Retail PMI of 48.3, up from 43.3. Given the volatile nature of this statistic, we struggle to take it too seriously, but we can at least add it to the few indicators bucking the MEDIUM TERM bearish trend.

Finally, Austrian PMI fell to 50.1 from 50.2, failing to buck the negative trend seen since earlier this year. This indicator is used on balance with the other European PMIs to identify the overall state of the European economy.

On balance, the day's economic news had a net negative effect on our Big Macro Picture MEDIUM TERM view, without giving us anything new to think about. The most significant news of the day, US Weekly Jobless claims, failed to show any signs of a reversing bearish trend - while showing particularly poor revised figures for last week.

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