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Category: Chart of the Week

By Brad Lamensdorf and John Del Vecchio

Emerging market currencies are imploding.

A quick look at the JP Morgan Emerging Market Currency Index shows the basket of currencies in freefall.

Why might this matter?

Well, 20 years ago a little currency few people had ever heard of called the Thai Baht brought the world to its knees for a period of time. That crisis interrupted the bull market for stocks and created a great deal of unrest.

The difference today is that the impact of emerging markets is much greater. In many cases, emerging markets are the growth engine of the world. And, the stiff deterioration in currencies is a warning sign. Just look at places like Venezuela with massive inflation and civil unrest.

Emerging markets are more important today than they were 20 years ago. The equity markets have been lulled back into a sense of complacency after a minor blip this February. But, there are numerous warning signs under the surface that investors should be concerned about.

Low volatility, market valuations, record low cash positions, optimistic sentiment, and now troubling currency trends are sounding the bell to be more vigilant in one’s portfolio.

BIG MO MULTI-CAP MSCI TAPE COMPOSITE

Big MO, is one of NDR’s most well know indicators. We  thought it interesting to show that it is in a full sell signal for the Euro exchanges.

I encourage you to read the definition below and study the chart closely. This could lead to trouble in the US markets.  

The NDR Big Mo Multi-Cap Tape Composite Model was created to give a composite reading on the technical health of the broad equity market. The model, plotted in the lower clip of the chart, aggregates the signals of over 100 component indicators and generates a reading between 0% and 100%, reflecting the percentage of the component indicators which are currently giving bullish signals for the S&P 500 Index. The chart’s top clip plots the S&P 500’s weekly closes.

The model uses trend and momentum indicators based on a broad array of our NDR Multi-Cap cap-weighted sub-industry group price indices. Trend indicators are based on the direction of a sub-industry’s moving average, while the momentum indicators are based on the rate of change of the sub-industry’s price index. By including many indicators together in the composite model, we find the “weight of the evidence” regarding the market’s trend and momentum rather than relying on only one or a few indicators. The specific signal-generation calculations for the model’s indicators were determined based on historical testing.

The boxes in the chart’s upper clip show two perspectives on how the S&P 500’s returns have historically been associated with the model’s readings. One box shows the market’s returns based simply on what range the model’s weekly reading falls in (high readings are bullish, low readings bearish), while the other two boxes together show how the market’s returns have varied based on both the level and the direction of the model readings. We have found that whether the model is improving (rising) or weakening (falling) can give valuable information in addition to the model’s current level: when Big Mo Tape has been high and rising, the returns have tended to be best, while a low and falling model reading has been associated with the weakest returns. And while the model was built based on the S&P 500 (a cap-weighted index of primarily large company stocks), we also found that it provides good results when using the broad, equal-weighted Value Line Geometric Index.

This model provides a single summary reading of the U.S. stock market’s technical health based on historical analysis of many trend and momentum indicators. Because one of NDR’s primary tenets is “Don’t Fight The Tape”, we use this trend-based model as a key element in our market outlook and strategy, and consequently it is used as a component of other NDR models as well.

This version of Big Mo uses our re-designed Sector work that adheres strictly to the S&P/MSCI Global Industry Classification System (GICS).

Brad Lamensdorf

By John Del Vecchio

In Brad’s most recent podcast, which you can listen to here, he talks about how investors need to pay attention to the financial sector as a clue to what might occur in the broader markets.

For example, in 2008, as we were headed to one of the biggest crisis of all-time, banks were weak all year. They were signaling trouble to come. And, boy did it come. While a few investors saw the storm on the horizon most folks had their head in the sand. Just months before the epic collapse, the talking heads on TV were praising the goldilocks economy. It was neither too hot or too cold. Government officials were promoting the idea of green shoots in the economy.

We all know how that turned out.
Is it Déjà vu all over again with the banks?
Take a look at the chart below:

The S&P 500 is marching toward fresh highs. Meanwhile, banks have reversed course and are near intermediate lows. Historically, this has been a warning sign. Three months later, after these conditions have been met, stocks are mostly lower. At worst, we might expect them to be flattish. The same holds true for six months after banks have historically led the way lower.

The record is mixed a year out. Of course, by then the powers to be have had time to react and adjust policy to restore confidence in the markets.

So, where are we today? It’s been on of the best capitalization periods for banks in the U.S. Regulations are also being watered down to the benefit of many financial institutions.

So, this question begs why are banks starting to perform so poorly? What are they signaling about the broader markets and economy?

If history is any guide, we will likely find out very soon.

The following chart from Shadow Statistics by John Williams compares the official government Consumer Price Index (CPI) with the significantly higher CPI that Williams calculates if the index was measured by pre-1990 methodology when interest rates generally were higher than inflation.  Williams believes that there’s been a sharp deterioration in the last couple of decades in the methodology the government uses to calculate CPI and it doesn’t reflect what consumers and businesses are really experiencing. In any case, both present government-calculated CPI and Williams’ “shadow” CPI show that the current 3% interest rates result in a nominally negative return. What does this mean? Interest rates are likely to go up 2% to 3% to more realistic levels.

Debt as a percent of nominal GDP has approached a 30-year high (yellow line), while defaults are hovering at all-time lows (green line). Why does that matter to you? Over the last three decades debt accumulation tended to occur several quarters before the default rates began to accelerate.  This setup, illustrated in the chart,  indicates that a large amount of defaults in the debt market are set to occur again. That historically leads to an increase in interest rates which can have a negative impact on the stock market and other risk assets. Sincere thanks go out to Rodd Mann, who shared the chart with us.

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