Daily Post For Wednesday May 15th 2024

The Business Cycle:

Is the US economy expanding or contracting?

Statistics:

Manufacturing ISM® Report On Business® is 49.2

Chicago Purchasing Managers Index (PMI) is 37.9

ISM PMI 6-month Average is 48.51

Chicago PMI 6-month Average is 44.81

Explanation:

Is the US economy expanding or contracting?

A four season cycle typically runs in 3-5 year periods and the PMI index typically swings between 45 and 60 during these seasons.

Below 50 is Winter. Above 55 is Summer. The Spring transitioning from winter bottom to summer top is the best time for risk assets as the economy grows and expands. The fall transition from summer top to winter bottom is the best time to be in low risk assets. During the fall everyone in high leveraged positions will be washed out.

World Central Bank Policy Trend:

Are 80+ international central banks hiking or cutting rates?

Statistics:

10-Week Moving Average: 6.13

30-Week Moving Average: 11.32

30W > 10W Average = World trend is loosening policy

Explanation:

This index is tracking the trend of how many of the banks increased or decreased their interest rate during their last meeting.

When central banks are hiking rates they are trying to prevent inflation by slowing the economy. When they cut rates they are trying to prevent deflation and boost the economy.

By using a 10-week and 30-week moving average we can plot a sentiment shift in the overall world economies on easing or tightening lending standards in the nations.

Compare this trend to the FED rate policy trend in the USA to get a sense of whether the USA is ahead or behind a global shift in central planning sentiment.

FED Rate Policy:

Is the FED ahead or behind the shorter term treasury rates?

Statistics:

Fed Funds Rate: 5.5%

6 Month Treasury Rate: 5.43%

1 Year Treasury Rate: 5.16%

2 Year Treasury Rate: 4.81%

(10 Year - 2 Year) Treasury Spread: -0.36% (Inverted (recessionary))

Fed Rate is above the 1-year and 2-year treasury signaling a potential rate CUT or PAUSE in rates during the next meeting.

Explanation:

The US treasury rates are updated during market hours frequently while the FED Rate is only updated about every 6 weeks during FED meetings.

If the 1+2 year rates are below the FED Rate this typically means that the FED rate may too high compared to market participant expectations and FED policy may ease or hold rates in order to open the doors for more lending and potential economy expansion.

If the 1+2 year rates are above the FED Rate this typically means that the FED rate may be too low and the FED may tighten rates to help prevent inflation due to increased economic expansion.

When the 10Y - 2Y Spread is inverted below 0, this generally means that the economy is in a recession or a winter period may be imminent. Investors are expecting economic slowdown and flock to longer-term securities as a safe haven, driving down long-term yields. This behavior is based on the expectation that the central bank (like the Federal Reserve in the U.S.) will cut interest rates to combat the slowdown, making current long-term bonds more valuable. Note that this dynamic of “stocks down bonds up” is is only correct during low periods of inflation (<2%). The higher the 3-year core inflation rate is the more in unison stocks and bonds will trade.

Inflation and Unemployment Targets:

Is the FED hitting it's target?

Statistics:

Unemployment Rate: 3.9%

PCE Index Inflation: 2.71%

PCE Mean Inflation: 3.04%

CPI: 4.46%

Core CPI: 4.51%

CPI -FoodEnergy: 3.15%

CPI -Shelter: 3.26%

Inflation is above the 2% target and unemployment is below the 4.2% target. According to FED policy, keeping rates higher would be more beneficial to the economy in order to lower inflation.

Explanation:

The FED sets rates to fulfill two objectives. They want inflation to be around 2% and they want “max employment” which balances out the economy at about 4.2% unemployment. They typically focus on the PCE Index rate. The theory is employment below 4.2% leads to more inflation. The FED will raise rates to slow inflation. This also leads to more unemployment as economy tightens and contracts. Keeping inflation low is the primary objective. If inflation is tame, the FED will continue to adjust rates to affect unemployment. The FED will never say “we must increase unemployment” but it is a net result of a tightening policy.

Percent of Stocks 10/20 DEMA Crossover (Short Term):

Is entire market pushing upward or fading short term?

Statistics:

Average Percent of stocks above 10/20 DEMA: 83.19%

Percent of stocks above 10/20 DEMA in Russell 2000: 75.9%

Percent of stocks above 10/20 DEMA in NASDAQ 100: 81%

Percent of stocks above 10/20 DEMA in S&P 500: 79.19%

Percent of stocks above 10/20 DEMA in DowJones 30: 96.67%

Percent of stocks above 10/20 DEMA in NASDAQ 10: 75.9%

Explanation:

The 10 and 20 Day Double Exponential Moving Average (DEMA) is a good indicator to gauge the short term price movement of an asset. We count each stock in the index and tally the ones where the 10 DEMA is above the 20 DEMA and this represents as percentage of the overall index. This is very similar to the "20/50 % above EMA" indicator except on a much shorter and faster time frame.

Note that the 10/20 DEMA indicators and the 20/50 EMA indicator work together. The 10/20 DEMA will lead and move fast both on the initial push up and the initial push down. Look for topping areas to fade on the 10/20 DEMA index first as the 20/50 EMA moves up. This indicates the strength of the market beginning to weaken and could signal a topping area.

Typically, the 10/20 DEMA will get a double bottom bounce and begin to move up before the 20/50 EMA. This is a good indicator of a potential bottoming area reversal in the overall markets.

Look at the Russell 2000 10/20 DEMA to near max out before tops and bottoms and then fade as the turn occurs.

Percent of Stocks Above 20 and 50 EMA (Medium Term):

Is entire market liquidity expanding or shrinking?

Statistics EMA20:

Average Percent of stocks above 20EMA: 60.03%

Percent of stocks above 20EMA in Russell 2000: 61.97%

Percent of stocks above 20EMA in NASDAQ 100: 54.16%

Percent of stocks above 20EMA in S&P 500: 59.47%

Percent of stocks above 20EMA in DowJones 30: 64.51%

Statistics EMA50:

Average Percent of stocks above 50EMA: 54.3%

Percent of stocks above 50EMA in Russell 2000: 57.6%

Percent of stocks above 50EMA in NASDAQ 100: 47.66%

Percent of stocks above 50EMA in S&P 500: 57.26%

Percent of stocks above 50EMA in DowJones 30: 54.67%

Explanation:

The 20 and 50 Day Exponential Moving Average (EMA) are good indicator of the overall direction of market liquidity on an index. We count each stock in the index and tally the ones above the EMA and this represents as percentage of the overall index. When these indicators are trending up, the percent of stocks above the 20 and 50 EMA will increase as more of the market becomes bullish and allocates more capital to the markets. When the market is trending down, capital is being removed from the markets and the percent of stocks above the 20 and 50 EMA will decrease.

The Russell 2000 is comprised of lower cap stocks and is a good indicator of risk appetite. When the Russell 2000 is leading the market higher, this is a sign that investors are willing to take on more risk. When the Russell 2000 is leading the market lower, this is a sign that investors are reducing risk and moving capital to safer assets. Larger cap stocks are typically less volatile and slower to move.

As a very general rule, the markets tend to swing in sentiment every couple months.

The 20 EMA is tracking more short term movement while the 50 EMA is tracking more medium term movement. You could also use the 200 EMA for longer term tracking but the 200 EMA swings tend to happen over very long periods of time (years vs months).

When risk-ON appetite begins liquidity tends to go into safer NASDAQ-100 stocks first. As the risk-ON appetite of investors continues to increase, liquidity will move deeper into the lower marketcap stocks in the Russell 2000. When risk-OFF appetite begins, liquidity tends to exit the riskier Russell 2000 stocks first and then the safer NASDAQ-100 stocks after.

Percent of Stocks Silver Cross (Medium Term):

Is entire market above or below a silver cross?

Statistics:

Average Percent of stocks w/ Silver Crossover: 47.82%

Percent of stocks w/ Silver Crossover in Russell 2000: 49.94%

Percent of stocks w/ Silver Crossover in NASDAQ 100: 41.03%

Percent of stocks w/ Silver Crossover in S&P 500: 54.06%

Percent of stocks w/ Silver Crossover in DowJones 30: 46.26%

Percent of stocks w/ Silver Crossover in NASDAQ 10: 49.94%

Explanation:

The silver cross is when the 20 EMA is above the 50 EMA. This is a medium term indicator of the overall market liquidity and can be a lagging confirmation to the shorter indicater movements. Do not trade against this trend.

This indicator tends to swing every few months. When the silver cross is above 50% this means more than half of the market is tredning bullish. When the silver cross is below 50% this means more than half of the market is trending bearish.

Look at the Russell 2000 to estimate the level of risk appetite in the market. When the Russell 2000 is leading the market higher, this is a sign that investors are willing to take on more risk. When the Russell 2000 is leading the market lower, this is a sign that investors are reducing risk and moving capital to safer assets. Larger cap stocks are typically less volatile and slower to move.

Percent of Top100 Stocks in Sector Golden Cross (Long Term):

Which sectors are above a goldencross?

Statistics:

Top 3 Strongest Sectors: Financial Services, Industrials, Energy

Bottom 3 Weakest Sectors: Utilities, Real Estate, Communication Services

Explanation:

Money Flows in and out of 11 sectors in the market. The strongest sectors are the ones with the most money flowing into them. The weakest sectors are the ones with the most money flowing out of them. To improve the odds of success, trade with the strongest sectors and avoid the weakest sectors.

When the market is in a risk-ON environment, money will flow into the more volatile sectors like Technology and Consumer Discretionary. When the market is in a risk-OFF environment, money will flow into the more stable sectors like Utilities and Consumer Staples.

Filter Stocks By Sector (sorted by strongest):

Industrials Real Estate Healthcare Technology Consumer Cyclical Financial Services Consumer Defensive Communication Services Basic Materials Utilities Energy

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