Thursday, 28 June 2012

US MARKET ANALYSIS (June 28th 2012): The Short, Medium and Long Term

It's worth keeping up to date with, and discussing, how our short, medium and long term views are being affected in real-time.

After rebounding over 7% in June, it was wise to question how valid the supposed MEDIUM TERM bearish stance had become, which we began to initiate from March onwards. In early June (prior to the rebound), we felt the different timeframes suggested the following:

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.

LONG TERM : Bull Phase, beginning March 2009 to present, indicated by expansionary signals in the global economy early/mid 2009, and the corresponding market recovery.

MEDIUM TERM : Bearish, beginning March 2012 to present, indicated by the deterioration of leading economic and market signals.

SHORT TERM : Bearish, indicated on a day to day basis by trend, momentum and Ichimoku technical analysis.

The main questions we began to ask were: Is the long term bull market at risk of coming to an end?  Will our medium term signals start to indicate hidden strength in the global economy/markets?


 A MEDIUM TERM bearish phase can, at the end of a bull market, turn into a LONG TERM bear market. Since the 2009-present bull market began, summer 2011 and summer 2012 are the only two times when we've questioned the health of the bull market. With a new MEDIUM TERM bearish phase beginning in March and the severity of declines in Europe, we naturally

What do we look for when assessing when a period like summer 2011 is threatening to turn into a new bear market? One of the simplest signs is whether or not we expect the United States, and other powerful economies, to enter a recession. Similarly, by mid-2009 at the end of the last bear market, we were able to identify a new bullish economic cycle forming when we believed US GDP would stop declining.

Presently, Europe and China are issuing signals that we can expect either slowing growth or contractionary conditions in 2012. However, the US economy has so far impressively diverged from the rest of the world in terms of forward-looking GDP expectations. We have no solid reason to believe the US is headed for recession in 2012 - at least, no indication so far. The same conditions prevailed in 2011, after which the US market made new highs in 2012, and avoided both a recession and a new bear market.

The Markit US PMI data in June suggested expansionary conditions should continue, and unless the ISM PMI data suggests otherwise on July 1st (or at any other point this year), we continue to have faith in the LONG TERM bull cycle from 2009-present.

US PMI by Markit - above 50 indicating expansion


The MEDIUM TERM bearish phase, which gradually became apparent from late February onwards, has shown few signs of improvement in June. However, it is vital to monitor how our leading economic and market indicators are faring, as the slightest divergence from market action can provide us with trading opportunites.

The BPNYA market-breadth indicator bottomed along with the market in early June, reflecting a short term bullish move. However, we tend to view the 20 week moving average as a fairly good measure for medium term cycles - and the BPNYA is still some way below that.  While we haven't made a lower low in BPNYA for two weeks, we are mindful of the risks in taking bullish positions within medium term bearish cycles.

Making the case for "green shoots of recovery" within this medium term phase, of course, we can be encouraged if the BPNYA weekly chart holds up. During routine market pullbacks, it is common for the BPNYA to retrace to 40-50 and eventually bottom - there are countless examples of summers when this has been the case (which you can check out on the BPNYA stockcharts link for yourself). It is not impossible that we have experienced a typical medium term pullback and have already bottomed - we're just yet to be wholly convinced.

Let's look at the global economic indicators which are useful in anticipating trends in the market. As usual for simplicity we'll stick to familiar indicators - the Markit PMI surveys and other regional business surveys. On the 21st, we received a new raft of data from the EU, which has so far been the most startling source of economic weakness.

We were provided with fairly mixed news - the majority of new data releases were below expectations, and continuations on the current MEDIUM TERM bearish trend. German Manufacturing and Services PMI both made new trend lows, as did EU Flash Manufacturing PMI. US Markit PMI fell to the lowest since July 2011, while HSBC China PMI fell to its lowest recorded reading.

On balance however, not all data was bad, and after a steep market retracement we always look for any signs of divergence in that trend. The EU Flash Services PMI and French Manufacturing and Services PMIs all beat expectations and rose for the first time since January/February. While we generally don't like to speculate on the causes of data fluctuations, we are aware that a weaker Euro and lower oil prices may serve as an automatic stabiliser for European economies, and will closely watch the data for signs of underlying economic improvement.

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