On The Verge Of The "Ultimate Death Cross"
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:From The Trend:
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....MOREAnd 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) 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....MORE
...So does this mean anything? Well, we can look at a worst case scenario for equities which is always Japan. The monthly death cross occurred in Japan in 1998 and 14 years later it is still in effect, a scary scenario for equity holders to be sure. But is a death cross always a bad thing? Of course, no. But the death cross needs to be neutralized and in a relatively short amount of time. Let's look at the Dow Industrials. The Great Depression saw a monthly death cross in January 1934 and didn't have a monthly golden cross until February 1946. Another monthly death cross actually occurred in August 1980 in the Dow Industrials but this was quickly neutralized as a monthly golden cross occurred in April 1982. The first monthly death cross in 1934 would have been nice to know as the market and world was tough for several years after that. Even though the nominal low of that secular bear had been hit in 1932, there is no question that 1934 was a lot closer to the beginning of that secular bear market. The monthly death cross in 1980 was without question near the end of that secular bear market. The Japan scenario and the 1934 signal in the Dow make sense as these were deflationary depressions so there was a sharp deflation of prices in the first market cycle of the new secular cycle and the averages eventually catch up with that. Japan is in an unprecedented 22+ years secular bear and the averages crossed 8 years in but this was still early on in their secular cycle. The fact that Japan does not have an election cycle like the U.S. may contribute to some of the difference in time....MORE