Certain parts of the stock market are being hammered. What this means for the S&P

by Troy

While the stock market remains close to all-time highs, certain sectors and markets that are more closely related to global trade (trade war!) are being hammered. This highlights a clear dichotomy that is evident among many indicators. Today’s headlines:

  1. Improving Citigroup Economic Surprise Index
  2. Boom-Bust Barometer – bust?
  3. Semiconductors have crashed
  4. Dr. Copper has crashed
  5. VIX’s bottom
  6. Baa Corporate Bond Yields are falling

Go here to understand our fundamentals-driven long term outlook. For reference, here’s the random probability of the U.S. stock market going up on any given day.

Citigroup Economic Surprise Index

The Citigroup Economic Surprise Index is improving right now.

Here’s what happens next to the S&P when the Citigroup Economic Surprise Index goes from less than -50 to greater than -30 in 1 month.

Boom-Bust Barometer

Zerohedge posted an interesting chart today about an indicator used by Ed Yardeni. Ed Yardeni is one of my favorite economist/strategists, and his book Predicting The Markets is one of the best investment books.

Anyways, here’s the Boom-Bust Barometer. You can see that it has absolutely collapsed during the stock market’s recent pullback.

Zerohedge likes to show a limited amount of data to trigger your recency bias and sell the crash crash crash narrative. So here’s the complete data from Yardeni himself.

Here’s the data in Excel format

Here’s what happens next to the S&P when the Boom-Bust Barometer falls more than -15% in 1 month (i.e. very sharp drop).

The sample size is small, so let’s loosen the parameters a little. Here’s what happens next to the S&P when the Boom-Bust Barometer falls more than -10% in 1 month

While this isn’t consistently bullish or bearish over the next 6-12 months, it is slightly bearish over the next 2 months.

So why has Yardeni’s Boom-Bust Barometer dropped so quickly?

Trade war.

The Boom-Bust Barometer takes the CRB Raw Industrials Index and divides it by Initial Jobless Claims. This is essentially using commodities vs. labor market as a means to gauge the overall health of the economy.

While Initial Claims have been flat over the past few months, the CRB Raw Industrials Index has dropped like a rock over the past month on trade war news.

This indicator basically represents the weakness in trade war related sectors right now.

Semiconductors

Semiconductors tend to outperform during a bull market and underperform during a bear market. The Semiconductor:S&P ratio has tanked recently.

*Semiconductors are also related to trade, since over 80% of U.S. semiconductor sales take place outside of the U.S.

The Semiconductor:S&P ratio has fallen a lot because Semiconductors have fallen much more than the S&P in the recent pullback.

This is an rather large drop, and the Semiconductor:S&P ratio’s 14 day RSI has fallen below 27 recent.

Historically, this was slightly bearish for stocks over the next 2 months.

Dr. Copper

Other trade war related markets are performing poorly as well. Here’s copper.

The popular narrative is “copper is crashing right now, just like it did before the September 2018 top! Must be Q4 2018 all over again!”

Let’s look at the data holistically to avoid recency bias. Here’s what happens next to the S&P when copper falls more than -8% over the past 50 days while the S&P rises more than +2%.

There is a slight bearish bias over the next 2 months.

Here’s what happens next to copper.

VIX

Baring a late-month stock market surge, VIX will probably close higher in May than it did in April.

Here’s what happens next to the S&P when VIX goes up for the first time in 5 months.

Here’s what happens next to VIX

Baa Corporate Bond Yields

Baa Corporate Bond Yields are falling. This is usually seen as a good thing for stocks.

Here’s the 6 month rate-of-change in Baa Corporate Bond Yields.

Here’s what happens next to the S&P when the 6 month rate-of-change falls below -7%.

Here’s what happens next to Baa Corporate Bond Yields