A second helping of bearishness on Tuesday, courtesy of Albert Edwards.
The Soc Gen strategist is worried about the recent slump in the US Economic Council Research Institute (ECRI) leading indicator. (You may not have heard of this, but no less an authority than the Economist says it has a stellar record).
Here is the ECRI’s weekly leading indicator:
Now, this is worrying because the ECRI has never fallen at such a pace, even in the middle of the subprime explosion, says Edwards.
This suggests the current market swoon this is something more than the technical correction seen in February. This time, markets are heading lower and leading indicators are rolling over — and that’s not good:
We highlighted recently that the equity market was ripe for a technical correction looking at an array of indicators (e.g., put/call and bull/bear ratios and percentage of stocks above the 50 day moving average). Most of they key technical indicators have now corrected (see chart below for example). It is perfectly plausible that we see some temporary consolidation here before the market resumes its downward march. What differentiates this correction and the one we saw in February is that the leading indicators are unwinding this time around. That should leave us sceptical that any rally will persist for long.
In fact it means it’s Kevlar vest time:
The key ECRI leading indicator has slumped in recent weeks. Together with the rapid rate of erosion in the pace of analysts’ EPS upgrades, this suggests that we are set for a very gloomy H2. As we head into a double-dip, the current technical correction will rapidly turn into a resumption of the structural bear market for stocks. We have not seen the worst yet.
Related link:
On the edge of a deflationary precipice… – FT Alphaville