I’m going to start today with a warning: Over the next three months, be prepared to see some of the worst economic data you’ve ever seen.
Why do I say this? It stems from the only economic indicators I regularly monitor, from the Economic Cycle Research Institute. The firm basically invented the concept of leading economic indicators--the guy who started the popular monthly leading indexes for the U.S. government left decades ago, founded this firm, and took the process to a whole new level.
The company has dozens of indexes, but the main one I monitor is the aptly named Weekly Leading Index. It has a great track record of telling us what the economy will look like in two to three months.
Here's the whopper: This morning (Friday), the weekly leading index's growth rate stood at a minus 24.6%. And what exactly does that mean? Well, not only has the rate fallen off a cliff in recent weeks, it's also the lowest reading … ever! And this is no small data series--ECRI says that its data goes back to January 1949, nearly 60 full years of information. That tells me that the next couple of months should see the sharpest slowdown/recession in decades.
Thus, this morning’s unemployment report (240,000 jobs lost, on top of a downwardly revised 284,000 jobs lost in September) is almost surely just the tip of the iceberg. I would venture a guess that we’re all going to be seeing some truly scary, once-in-a-lifetime readings on jobs, industrial production, economic growth, you name it.
Actually, that process is already underway. Just this week, General Motors (NYSE: GM, Stock Forum) reported monthly vehicle sales of less than 200,000 for the first time in years. The figure was down 45% from just a year ago! GM Sales Chief Market LaNeve said, “In my 27 years in the industry, I’ve never seen a month like this,” adding that, adjusted for population growth, October was likely the single worst month for the auto industry since World War II.
Another example came last night, when networking behemoth Cisco (NASDAQ: CSCO, Stock Forum) sharply cut its guidance. For the current quarter, it anticipates revenues will decline 5% to 10% from the prior year, compared to earlier estimates of a 6% gain. It might not sound dramatic, but the difference is from $10.4 billion (analyst’s former estimate) to around $9.1 billion (the new guidance).
If the Institute’s leading index is correct, and I believe it is, you should be ready for more such “worst in decades” readings in the weeks and months ahead.
Now I’m going to continue this piece with another word of advice: You shouldn’t read too much into the coming economic data.
Why did I write about the approaching maelstrom if you should simply ignore it? Because I want you to be prepared for some hugely worse-than-expected readings, and (more important) for all the hoopla and headlines that will surely come along with them.
What’s key to remember is that the market has already discounted much of the bad news you’re going to read about. That’s why the major indexes are down more than 35% this year, and why they crashed in September and October. That doesn’t mean the market will shrug off all the bad news--the big drop on Thursday after Cisco’s earnings outlook (along with horrible retail sales reports) attests to that.
My point is that the market is reacting to what the economic landscape will look like in six months, not the economic readings of yesterday. And from that point of view, I continue to think there’s a good chance that the market is beginning a bottom-building process.
Despite the declines seen this week, most indexes are still well above their lows of mid-October. And, more important to me, the market is now 20 trading days removed from its major October 10 low, when a still-unbelievable 88% of all NYSE stocks hit one-year lows.
Stocks could (emphasize could) be starting a re-test process, where the major indexes again fall back to their October 10 levels. Historically, bear market bottoms see these re-tests, and they usually occur anywhere from 25 to 40 trading days after the initial low (October 10, in today’s scenario). So we’re right on schedule.
Seeing this process unfold also makes sense because, to get a sustainable rally (if not a whole new bull market), you need leadership, which is defined by companies with solid sales and earnings growth, and whose stocks are well traded and have built solid launching pads. Right now, there are just a handful of potential leaders--at the start of a big rally, you’ll see a couple dozen, with more emerging soon after.
A re-test, then, is not something to fear, but has historically been a necessary and (eventually) bullish event that’s led to a sustainable upmove. The latest successful bottom/rally/re-test process came earlier this year, in January and March. While that didn’t lead to a new bull market, it did lead to a two and a half month rise, led by commodity stocks, providing some nice profits.
Thus, on the indexes, here’s what to watch for: See whether the Dow can hold above 8,000 to 8,300 or so, and if the S&P 500 can hold the 850 area. If they decisively break below those levels … well, then, just remain defensive, and be glad you’re holding on to your capital.
However, if the indexes do re-test those levels sometime in the next couple of weeks, sit up in your chair--the market may have laid the groundwork for a few good months ahead … despite what the economic indicators may say.
A growth stock and market timing expert, Michael Cintolo is the Vice President of Investments at Cabot Heritage Corporation, as well as analyst and editor of Cabot Market Letter and Cabot Top Ten Report. Michael is also a frequent contributor to The Iconoclast Investor. In his more than 10 years at Cabot, he has uncovered exceptional growth stocks and helped to create new tools and rules for buying and selling stocks. Perhaps most notable was his development of the proprietary trend-following market timing system, Cabot Tides, which has helped Cabot place among the top handful of market-timing newsletters numerous times.
Read more Stockhouse articles by Michael Cintolo.