There She Goes Again

Cross Asset
6th July 2015
Paul Mylchreest
Email: paul.mylchreest@admisi.com
Tel: +44 20 7716 8257
There she goes, there she goes again

S&P500: technical indicator which called the 2000 & 2007
peaks gives first sell signal for current bull market in Equities
The Adjusted MACD indicator, using exponential moving averages of 25, 26 and 6 days
instead of the default 12, 26 and 9 days, gave sell signals one month before the S&P 500
peaked in March 2000 and two months after the peak in October 2007. It has just given its
first sell signal in the current bull market implying, at the very least, that we are moving into a high risk period for equities and other financial markets. Backing this up are indicators
which are contradicting the optimistic theses regarding reflation of the global economy and
robust bounce back in the US. It also strikes us as potentially significant that this signal has
coincided with Eurozone tensions, relating to the possibility of Grexit, and the crash in
Chinese equities.
Source: ADMISI, Bloomberg

1
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Company. Risk Warning: Investments in Equities, CFDs, Futures, Options, Derivatives and Foreign Exchange can fluctuate in val ue, investors should therefore be aware that they may not realise the initial amount invested, and indeed may incur additional li abilities. These Investments may entail above average financial risk of
loss, and investors should therefore carefully consider whether their financial circumstances and investment experience permit them to invest and, if necessary, seek the advice of an independent Financial Advisor. Some services described are not available to certain customers due to regulatory constraints either in the United
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Cross Asset Strategy

Paul Mylchreest
Tel: +44 20 7716 8257
Developed world equity markets, and the S&P 500 in particular, have frequently appeared to decouple from changes in benchmark bond yields (e.g. 10-year US Treasury), changes in the outlook
for US/global GDP growth and revisions to earnings estimates during the last 12-18 months.
In such an unusual environment, we felt that it was worth looking for technical indicators which
gave well-timed sell signals on the S&P 500 at the last two bull market peaks in March 2000 and
October 2007.
In March 2015, we highlighted what we found to have been the best one, which we refer to as the
Adjusted MACD indicator. MACD stands for Moving Average Convergence/Divergence. It consists of three time series.
MACD series;
the signal or average series; and
the divergence between the two.
From Wikipedia.
The MACD series is the difference between a fast (short period) exponential moving average
(EMA) and a slow (longer period) EMA of the price series. The average series is an EMA of the
MACD series itself. The MACD indicator thus depends on three time parameters, namely the time
constants of the three EMAs. The notation "MACD(a,b,c)" usually denotes the indicator where
the MACD series is the difference of EMAs with characteristic times a and b, and the average series is an EMA of the MACD series with characteristic time c. These parameters are usually measured in days. The most commonly used values are 12, 26, and 9 days, that is, MACD(12,26,9).
Please also note that an EMA uses exponentially decreasing weights to older data points in a time
series.
While the MACD is normally calculated on EMAs of 12, 26 and 9 days, we noted that the best indication for predicting the last two peaks in the equity market was 25, 26 and 9 days. Based on further work, we have established that the best combination is based on EMAs of 25, 26 and 6 days.
This gave sell signals on the S&P 500 in February 2000, i.e. one month before the 2000 peak, and
December 2007, i.e. two months after the 2007 peak.
Below is the current monthly adjusted MACD chart for the S&P 500 since 1998. In June 2015, we
saw the first crossover from positive to negative since December 2007. You can see that the white
line in the lower pane has crossed below the red line. This results in a negative value for the relevant green bar which measure the difference between the white and red lines.
2
ADM Investor Services International Limited is authorised and regulated by The Financial Conduct Authority. Member of The London Stock Exchange. Registered office: 4th Floor Millennium Bridge House, 2 Lambeth Hill, London EC4V 3TT. Registered in England No. 2547805 a subsidiary of Archer Daniels Midland
Company. Risk Warning: Investments in Equities, CFDs, Futures, Options, Derivatives and Foreign Exchange can fluctuate in value, investors should therefore be aware that they may not realise the initial amount invested, and indeed may incur additional liabilities. These Investments may entail above average financial
risk of loss, and investors should therefore carefully consider whether their financial circumstances and investment experience permit them to invest and, if necessary, seek the advice of an independent Financial Advisor. Some services described are not available to certain customers due to regulatory constraints
either in the United Kingdom or elsewhere. 2014 ADM Investor Services International Limited 2014.

Paul Mylchreest
Tel: +44 20 7716 8257
Looking at the current bull market in the S&P 500, we can think of several indicators which had correlated with the rising trend but fell away as the S&P 500 continued its rise.
For example
The equity bull market was closely correlated with post-crisis reflation for four years, until it began
to breakdown in early 2013. Well come back to the subject of reflation.
3

Paul Mylchreest
Tel: +44 20 7716 8257
The close correlation with high yield spreads continued into mid-2014 before that gave way.
The upward trend in the S&P 500 was closely mirroring the expansion of the Feds balance sheet.
That correlation has broken down since Fed balance sheet growth flattened off in late-2014 following the end of QE3.
4

Paul Mylchreest
Tel: +44 20 7716 8257
The divergence between the S&P 500 and the Transports has become marked since early 2015.
In addition, the S&P 500 Buyback Index, which measures the performance of the top 100 stocks in
the S&P 500 in terms of buyback ratio (buybacks during the last four quarters divided by market
cap) has failed to make a new high since early March. The scales in the chart below are identical.
So...the Adjusted MACD indicator! could be correct in signalling a peak in the current equity bull
market...give or take a month or two as has been the case in the past.
5

Paul Mylchreest
Tel: +44 20 7716 8257
But...are there indicators which are still supportive of the S&P 500?
Its still tracking monthly data on NYSE margin debt fairly closelyalthough the longer the longer
this continues the more concerning it is. As investors in Shanghai discovered.
Its not a close fit but the S&P 500 has been broadly tracking the improvement in Initial Jobless
Claims which, like NYSE margin debt (and the S&P 500 itself) bottomed in February/March 2009.
6

Paul Mylchreest
Tel: +44 20 7716 8257
The improvement in Initial Claims has just surpassed the best level in 25 years (in fact its the best
level since the early-1970s).
The scope for further improvement from here is likely to be modest.

Another argument supporting equities has been that the global economy is heading into a period
of reflation. We are sceptical at this point, even though we think the endgame will ultimately be
very inflationary (deflation first?).
A critical market event during recent months was the more dovish than expected FOMC meeting
on 18 March 2018. This was the catalyst for the unexpected (at the time) recovery in the price of
the worlds most inflation-critical commodity. This prompted bond yields to follow suitand
theyve remained firm even as the rise in the oil price levelled off.
7

Paul Mylchreest
Tel: +44 20 7716 8257
We have been keeping a close eye on some commodity prices and freight/trade indicators which
contradict the global reflation view.
For example, the copper price and the Turkish scrap steel import price both bottomed before the
low in the oil price in the early 2015.
Dr Copper has suffered a significant sell-off in recent weeks.
8

Paul Mylchreest
Tel: +44 20 7716 8257
Turkey is the worlds largest importer of scrap steel for its electric arc furnaces. The price bottomed
in mid-February 2015 but has rolled over again.
The Chinese Rebar price was tracking copper closely until this year. With barely an upward correction, the rebar price has plunged to an all-time low.
9

Paul Mylchreest
Tel: +44 20 7716 8257
There has been some recovery in the prices of row crops recently, but food prices and the year-onyear change in the CRBs Spot Foodstuffs Index remain subdued.
We still cant work out why the sugar price often acts as a leading indicator for commodity prices in
general, but its still not signalling an imminent rebound in the latter.

Paul Mylchreest
Tel: +44 20 7716 8257
The Nomura Asia Export Leading Index (AELI) is weak.
This indicator consists of eight components including the Emerging Markets Manufacturing PMI,
China Manufacturing PMI, new orders in China Manufacturing PMI, LEIs for the Major 5 Asia, US
semiconductor global sales and Chinese imports.
Container throughput in Singapore has suddenly plummeted.

Paul Mylchreest
Tel: +44 20 7716 8257
The recovery in the share prices of non-Chinese shipping companies, such as Koreas Hanjin Shipping, has faded.
The Containerized Freight Index for exports from Shanghai is now at the lowest level on record
since it was created in late-2010.

Paul Mylchreest
Tel: +44 20 7716 8257
In the US, the Cass Freight Index Shipments is back in negative territory.
Finally on the subject of reflation, the acceleration in US wage growth has eased off again.
In summary, the reflation argument looks unconvincing at this point.

Sticking with the USthere are a number of indicators that are in opposition to the optimistic
consensus on the economic outlook.

Paul Mylchreest
Tel: +44 20 7716 8257
The ratio of inventories to sales in the wholesale segment of the economy has reached recessionary levels. This suggests that a phase of restocking could be in prospect. That is definitely not in
Bloombergs quarterly consensus forecasts.
Before anybody objects, here is the ratio excluding petroleum in order to remove the oil price impact.

Paul Mylchreest
Tel: +44 20 7716 8257
Capacity utilisation appears to have peaked for this cycle.
The year-on-year change in factory orders is in recessionary territory...destocking?

Paul Mylchreest
Tel: +44 20 7716 8257
The same with retail sales if we exclude autos, which are in their own subprime bubble driven by
cheap credit.
Retail sales excluding autos have become strongly disconnected with the growth in nonfarm payrollsthe latter being probably the most politicised of all US economic indicators.
Something doesnt feel quite right...and we havent even mentioned liquidity in credit markets!
She calls my name, she calls my name, she calls my name (John Power backing Lee Mavers)

Paul Mylchreest
Tel: +44 20 7716 8257
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There She Goes Again

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Cross Asset

6th July 2015

Tel: +44 20 7716 8257

There she goes, there she goes again

Source: ADMISI, Bloomberg

Cross Asset Strategy

Tel: +44 20 7716 8257

the signal or average series; and

the divergence between the two.

Cross Asset Strategy

Tel: +44 20 7716 8257

Source: ADMISI, Bloomberg

Source: ADMISI, Bloomberg

Cross Asset Strategy

Tel: +44 20 7716 8257

Source: ADMISI, Bloomberg

Source: ADMISI, Bloomberg

Cross Asset Strategy

Tel: +44 20 7716 8257

Source: ADMISI, Bloomberg

Source: ADMISI, Bloomberg

Cross Asset Strategy

Tel: +44 20 7716 8257

Source: ADMISI, Bloomberg

Source: ADMISI, Bloomberg

Cross Asset Strategy

Tel: +44 20 7716 8257

Source: ADMISI, Bloomberg

The scope for further improvement from here is likely to be modest.

Cross Asset Strategy

Tel: +44 20 7716 8257

Source: ADMISI, Bloomberg

Source: ADMISI, Bloomberg

Cross Asset Strategy

Tel: +44 20 7716 8257

Source: ADMISI, Bloomberg

Source: ADMISI, Bloomberg

Cross Asset Strategy

Tel: +44 20 7716 8257

Source: ADMISI, Bloomberg

Source: ADMISI, Bloomberg

Cross Asset Strategy

Tel: +44 20 7716 8257

The Nomura Asia Export Leading Index (AELI) is weak.

Source: ADMISI, Bloomberg

Source: ADMISI, Bloomberg

Cross Asset Strategy

Tel: +44 20 7716 8257

Source: ADMISI, Bloomberg

Source: ADMISI, Bloomberg

Cross Asset Strategy

Tel: +44 20 7716 8257

Source: ADMISI, Bloomberg

Source: ADMISI, Bloomberg

In summary, the reflation argument looks unconvincing at this point.

Cross Asset Strategy

Tel: +44 20 7716 8257

Source: ADMISI, Bloomberg

Source: ADMISI, Bloomberg

Cross Asset Strategy

Tel: +44 20 7716 8257

Capacity utilisation appears to have peaked for this cycle.

Source: ADMISI, Bloomberg

The year-on-year change in factory orders is in recessionary territory...destocking?