Today’s chart steps back to take a much longer-term perspective on the current market. This chart best explains my continued bearish bias over the entire summer, and why I do believe the last 50 points in the SPX have been a sucker’s rally. Clearly, the short-term movements hurt me in August, and this chart is not by any means a way to justify those losses. Options traders have to be nimble in the short-term no matter the long-term thesis. But I bring it up because trading is much easier with the wind at your back in terms of the broader market, and I do think the wind will be at the back of bearish bets throughout the fall of 2012.
This chart is from the TheShortSideofLong blog, illustrating the U.S. stock market over the last 17 years, juxtaposed with the ECRI (Economic Cycle Research Institute) Weekly Leading Index during that time period:
Two things stand out about this chart to me. First, look at how much more volatile the ECRI index has been in the past 5 years relative to the previous 17 years. The ECRI registered a much higher high in 2006-2007, and a much lower low in 2008-2009 compared to the pre- and post-recession periods in 1999-2000 and 2001-2002 respectively. The recent ups and downs in the economy have continued in the past 3 years, highlighting the increased uncertainty and volatility in the broader economy (not just the stock market) after the financial crisis. This has made business planning and forward-looking guidance much more tenuous.
Second, the ECRI weekly leading index has remained near the lows of the last 2 years, while stocks have continued to rally this year. As TheShortSideOfLong points out in his own blog post, this type of divergence has historically been resolved in favor of the fundamental data. Central banks seem to have been successful in delaying that resolution, but I think a stock market catch-down is still the more likely outcome.