We will get into the punchline from Albert Edwards' latest missive shortly, but first we wanted to share his view on analyst sentiment, and how it relates to the US economy:
Regular readers will know that we have always followed analyst optimism closely (optimism here defined as the percentage of analysts EPS forecast changes that are upgrades). We have shown previously that it is not the level of analyst optimism that is important for the equity market, but the change in optimism (see right-hand chart below). Somewhat surprisingly we have found that the change in analyst optimism tends to be a very good leading indicator of economic activity (it mirrors almost exactly the OECD and Conference Board leading indicators), but it is published on a far more timely basis, and more importantly it is not subject to revision in the way the economic data and leading indicators are.
Hence we note that the aggregate monthly analyst optimism data has slid below the previous lows of last year and the year before, to the sub-40% mark (see chart above). This has taken the 6-month change in optimism back into negative territory, which is beginning to drive the equity market back into bear market territory (see left-hand chart below).
My colleague Andrew Lapthorne calculates analyst optimism data on an even more timely bottom-up basis and publishes it in his weekly Global Equity Market Arithmetic- link [8]. He notes the dramatic collapse in the US analyst optimism to below 30% for three weeks in a row! These data are entirely consistent with a US already in recession and supports that recent assertion in an interview with Lakshman Achuthan of the ECRI – link [9].
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In short: the recession is now here, just as it was in the fall of 2011 until global coordinated easing injected trillions and masked its impact, and will manifest itself unless the global central banks step up far more aggressively and tune out reality once again (this time with a half life that will be, well, half of the prior intervention).
And now, for the main event:
Finally I want to share with you news that the S&P is on the verge of an “ultimate” death cross (see chart below). This is where a 50-month moving average (currently at 1152) falls below the 200-month average (currently 1145). The Trend blogspot (link [11]) tries to make some sense of this very rare event. They note that the averages came close to crossing in 1978 towards the end of the 1965-82 secular bear market, but just held. By contrast Japan suffered a monthly death cross in 1998 and 14 years later we are still in the firm embrace of the bear. Watch this space.
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