Wednesday, May 16, 2012

Global Growth Barometer & Fundamental Stock Market Indicator

Yesterday, I introduced a new daily indicator, Global Growth Barometer (GGB). It is basically an average of the CRB raw industrials spot price index and the price of a barrel of Brent crude oil. The S&P 500 has been very highly correlated with this barometer since mid-2008. I arithmetically modified it so that it has been useful for gauging whether stocks are overvalued or undervalued relative to the GGB. Yesterday, the S&P 500 closed at 1330.66, while the GGB was down to 1286.35. This certainly suggests that in the near term there may be more downside than upside for stock prices.

The strong positive correlation between industrial commodity prices and stock prices isn’t surprising. But why wouldn’t lower oil prices be bullish for stocks since most companies that use petroleum products would benefit? Obviously, weaker oil prices would be bearish for energy-related shares, but they account for only 11.1% of the S&P 500’s market capitalization. Apparently, investors tend to associate rising and falling oil prices with rising and falling global economic growth. That may not always be the case, which is why averaging the price of oil with a broad index of other industrial commodity prices results in a much better fit with the S&P 500 than for each of these two components of the GGB separately.

Of course, I will continue to track my trusty Fundamental Stock Market Indicator (FSMI) as well. It is also highly correlated with the S&P 500, and with my new GGB. It is weekly rather than daily. Both indicators have in common the CRB raw industrials spot price index as a component. It is probably the most sensitive gauge of global economic growth. The FSMI’s other two components are the weekly Bloomberg Consumer Comfort Index and initial unemployment claims. Both are US-centric. The FSMI is available through the week of May 5. It isn’t as bearish right now as the GGB, but it certainly confirms the recent dip in stock prices.

Today's Morning Briefing: The Greek Question (1) The Oracle of Grexit. (2) Is Greece the same as Lehman? (3) Moving more to the left. (4) Merkollande prepared to study. (5) Grexit would be “messy,” and might cost €1trillion. (6) Bank run in Greece. (7) Our new Global Growth Barometer is currently bearish. So is FSMI. (8) Can S&P 500 revenues continue to grow around 5%? (9) Industry analysts too optimistic. (10) Will global growth stay positive? (11) Retailers have had a great run. (More for subscribers.)

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