Wednesday, August 6, 2014

Fundamentals Remain Bullish (excerpt)

My Fundamental Stock Market Indicator (FSMI) rose to another new record high during the week of July 26. It now exceeds the 2007 peak by 4.7%. It’s up 3.1% over the past four weeks. The FSMI has been highly correlated with the S&P 500 since 2000. It didn’t track the stock market as well prior to that year.

Since 2012, the S&P 500 has outpaced the FSMI. Does this divergence suggest that stocks need to fall back towards our FSMI? I certainly don’t think so. I constructed the FSMI as an index--combining three high-frequency fundamental indicators--which I believe shows the underlying direction of the market. More specifically, I average Bloomberg’s Consumer Comfort Index (CCI) and my Boom-Bust Barometer (BBB), which is the CRB raw industrials spot price index divided by initial unemployment claims. (Both the CCI and BBB are four-week moving averages.)

Of course, corporate earnings are the fundamentals that truly drive stock prices. Not surprisingly, my FSMI is highly correlated with S&P 500 forward earnings. My Boom-Bust Barometer is also highly correlated with S&P 500 forward earnings, with both rising at a faster pace recently into record-high territory.

Today's Morning Briefing: Fundamentally Speaking. (1) FSMI at new record high. (2) Three high-frequency indicators. (3) Boom-Bust Barometer is booming. (4) Forward earnings booming too. (5) Still no recession in ECRI Weekly Leading Indicator. (6) July was a good month for US according to purchasing managers. (7) Eurozone’s retail sales showing signs of life. (8) China’s M-PMI moving higher, but employment component remains weak. (More for subscribers.)

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