Market Analysis

The Missing Link

If I keep this up I’ll soon be accused of being a permabull 🙂 Oh I’m kidding. Yes I’m macro bearish but trade direction practical and data and technicals matter.

Hence a quick follow up to the Bear Trap case, specifically 2 key data points that could matter greatly here and may represent a missing link in the current bear case: Industrial production and GAAP earnings.
Whatever justified concerns there are currently here’s a fact: Neither GAAP earnings or industrial production have turned south yet.

They may well turn going forward, but fact is the US has been on an industrial production tear versus the rest of the world (chart via Bespoke):

Why is that noteworthy in the current environment? Because there’s no evidence suggesting bear markets are occurring with earnings and industrial production still expanding:

The 2000 and 2007 bear markets came on a turn in industrial production and so did the earnings recession in 2015. Clearly that is not happening here as of yet. Now watch that change and all bets are off. As we’ve seen these figures and turn quickly and sharply.

In terms of GAAP earnings, the acceleration in 2018 is massively driven by US tax cuts and they represent a problem for 2019 for comparison purposes, so a slowdown or a regression from the current picture is highly probable into 2019.

In 2000 GAAP earnings continued to muddle higher as the Nasdaq bubble had already popped, but $SPX made another run at the near the highs later in 2000. Why? One could argue because industrial production moved higher once again and earnings kept producing, but then industrial production turned south and that was the move toward the recession.

In 2007 the market peak coincided with a peak in GAAP earnings and industrial production. Both turned south quickly and the rest is history.

So where’s the evidence as of now that these key variables have turned?

I’m not saying they won’t, indeed from a macro bearish perspective it is highly probable that they will and then watch out.

Indeed one could make the case that the industrial production growth curve has already turned and hence it’s a potential warning flag:

But because GAAP earnings and industrial production haven’t turned in absolute numbers yet it lends additional credence to the Bear Trap case for another larger rally to emerge first before an actual bear market comes to fruition. That is of course if we see positive resolution to some of the macro issues discussed in the article.

But for now, GAAP earnings and industrial production represent a missing link in the bear case, but clearly they are key items to watch.


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