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.)
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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