Wednesday, September 18, 2013

Our Fundamental Indicator Remains Bullish for Stocks (excerpt)

Our Fundamental Stock Market Indicator (FSMI) rose to a new cyclical high of 116.0 during the first week of this month. It’s up 131% from its cyclical low of 50.2 during the week of February 7, 2009. It is only 8% below the previous cyclical peak during the week of May 5, 2007. Our weekly indicator reflects a combination of three components related to the fundamentals of the US economy: initial unemployment claims, the CRB raw industrials spot price index, and the Bloomberg Consumer Comfort Index.

Our FSMI has been highly correlated with the S&P 500 since 2000. So it is currently continuing to confirm the upward trend in stock prices based on the fundamentals. It turns out that our indicator is also highly correlated with the Weekly Leading Index compiled by the Economic Cycle Research Institute (ECRI). For the past year, the Institute has been declaring that the US economy is falling into a recession. That forecast has become less credible as even their index has risen since early 2012 to the highest level since April 30, 2010.

The components of the ECRI index are top secret. Ours are open source. The reality is that all the daily and weekly ingredients used to cook up the ECRI index are publicly available. It’s the recipe, i.e., which ingredients are used and how they are mixed, that’s proprietary. In addition to the fundamental indicators we use, the folks at ECRI probably include financial variables including the S&P 500 and the yield spread between high-yield bonds and the 10-year government bond. Both of our indicators are highly correlated with these two financial variables.

Today's Morning Briefing: The Best Indicator. (1) Fundamental Stock Market Indicator remains bullish. (2) FSMI vs. ECRI. (3) Top secret vs. open source. (4) Latest jobless claims distorted, but trend is down. (5) Weekly consumer confidence down, but on uptrend. (6) Industrial commodity price index flat-lining. (7) The best cure for high commodity prices. (8) That was a short super-cycle. (9) EMEs and commodity prices joined at the hip. (10) Will China grow fast enough to boost commodity prices again? (11) Focus on underweight-rated S&P 500 Materials. (More for subscribers.)

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