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July Fundamentals Prop Up Markets

|Includes: SPDR S&P 500 Trust ETF (SPY), SSO


All indicators showing positive results.

Fed-funds rate and tariffs still central concerns to market participants.

Numbers suggest no recession risk in the near term (6-months).

Leading economic indicators reported as of 4th August 2018 show strong growth potential in the United States economy for the short/medium term. All major leading indicators currently show growth supported by a positive reading of the Conference Board leading index. All coincident/confirmation indicators confirm growth. All 'Simple Stock Model' indicators confirm growth. Implied GDP growth currently sits at a fairly strong level of 3.55%. Official Q2 GDP at 4.1% (The average of the implied Q2 reports sat at 4.0%)

James Picerno's and IM markets Business cycle reports currently show 0% probability of recession occurring in the next 12 months. Intensity corporation's A.I. powered recession risk model has been revised outwards to an approximate recession start date of July 2019


Indicator Brief

With a positive reading from the Conference Board LEI among other positive reports from James Picerno and IM market signals, one would be forgiven for thinking this months report was all sunshine and roses when casting an eye over the sea of green indicator readings. However the reality may not be quite as positive as it seems, as one of my favorite and most economically important indicators, the Institute for Supply Management PMI and NMI indexes suffered the fastest combined monthly drop in 2 years.

rate of change

Historically the ISM PMI's can be quite temperamental, often with their level and rate of change needing to be observed in unison to gain a fair understanding of the current conditions. While this extreme drop in business confidence is unusual occurrence, the absolute level of the composite PMI's is still reasonably high at 56.9. This being said, the index does appear to be moving through some sort of of three wave micro-cycle that could be implying a persistent trend lower in the future upon the influences of tariffs, higher interest rates and extreme price pressures.

three wave

The ISM business confidence reports posted feedback from respondents including:

Business is up overall, but a lot of questions loom over the rest of the year. These include concerns about international markets and the increasing tariffs that impact the landed costs of goods. (Retail Trade)

Business is moving along at a brisk pace, outperforming the annual plan year-to-date (calendar year financials). However, internationally, nationally and locally, we are finding many manufacturers behind schedule due to capacity constraints. They are stating their order intake is heavy and/or they cannot find qualified employees to get all the work done. (Machinery)

Vendors continue to report that they are seeing significant increases in order volume this year. They report having to hire more staff to keep up with the increase in orders. (Management of Companies & Support Services)

All other indicators read positive results with a rather stark lack of controversial information.

State of the Market

Current linear regression data (R^2: 0.98) shows the current projected break-even date to be 30/8/2019. A.I. recession prediction shown as the light red box.

  • Projected forward returns to the end of 2018 at -4.41%.
  • Projected forward returns to the end of 2019 at 2.31%.

index Technically there is a possibility for a significant mean-reversion event considering the price is at the outer limits of it 2nd standard deviation channel. Positive economic data implies corrections can be used as a buying opportunity.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.