In today’s post we’ll update the top 6 economic indicators as of mid April 2017. The final 2 indicators for March were released this morning. Each of the 6 indicators is updated with March data. For background on the top 6 see here.
The table below shows the current heatmap for the top 6 indicators.
All of the 6 indicators remain green for this month. 3 of the indicators showed improvement, 3 showed deterioration. None are even near a warning signal. This also means that there is no trigger for the COMP indicator which means there is no possibility for the SPY-COMP system to trigger this month. Here is a brief update on each of the 6 indicators.
- Unemployment rate – Mar was another strong month for the employment rate, despite the weak reading in the headline jobs number. UER is down to 4.5%. Below it’s 12 month SMA. No signs of weakness in this indicator.
- Real retail sales – Mar year over year change increased to 2.71%. Nominal sales were down month over month but the real number was up.
- Industrial production – this month’s year over year change in IP slowed again to a 2.42% increase. Still growing and not near a recession but this has been a weak point of the recovery for a long time now.
- Permits – the March number was better than expected. Permits were up almost 17% over a year ago.
- Leverage – latest reading is a -0.68. A slight deterioration from last month but no signs of concern here.
- Yield curve – worse this month. Tightened again this month to 143 bps. Last July (2016) the yield curve tightened to 118 bps. Bears watching.
A mixed bag for the month but nothing is signaling cause for recessionary concern. At least for now.
That’s it for this month. In summary, all 6 individual economic indicators are currently green.
9 Comments
David · April 18, 2017 at 11:27 am
Hi !
I can’t find out how you move in to the market again after a recession. Is it when one of the signals trigger or must they all be green ? and then S&P 500 SMA 200 is crossed ?
paul.novell@gmail.com · April 19, 2017 at 5:33 am
SPY-COMP re-enters the market when the SPY crosses back above it’s 200 day SMA.
Douglas Nashif · April 18, 2017 at 11:47 am
Thanks Paul. I really appreciate the info that you put out for us.
Doug
Bernie · April 21, 2017 at 2:03 pm
Really appreciate you keeping us up to date on these worthwhile indicators. Yes the yield curve is a bit disconcerting. I’d weight it heaviest of the six
Cheers
Bernie
(Currently staying in your Arizona boondocking spots!)
paul.novell@gmail.com · April 21, 2017 at 2:12 pm
Your welcome Bernie. The yield curve actually has the worst track record of the six indicators.
Paul
MaxD · April 22, 2017 at 6:22 am
Hi Paul- Do you have any thoughts on Cambria’s new etf: TAIL (http://www.cambriafunds.com/Data/Sites/34/docs/Cambria_TAIL_Prospectus.pdf)? Or, the general strategy of using put options as defensive protection for a long-only portfolio? Benefits/drawbacks for a globally diversified quant portfolio using the SPY-COMP approach?
Thanks
paul.novell@gmail.com · April 22, 2017 at 9:05 am
Not a fan of using put options as a hedge. So, not a fan of TAIL. Just makes it easier to lose money is all. I calculate that at current option prices and interest rates, the expected return of protecting against a 10% downside is about -3% a year. Add their 0.59% in fees and the expected return of TAIL right now is about -3.6% a year. This will change with interest rates and volatility but that’s what it is now. I’d much rather use a pure TAA approach or a TAA/Quant approach protected with a SPY-UI or SPY-COMP indicator.
Paul
RickH · April 29, 2017 at 7:08 pm
I love this idea of adding a recession flag to a trend following system. I’ve studied trend following off and on before, but no matter how I tweaked the system, the more accurately I accounted for real-life slippage like price gaps causing bad stop executions, the worse it underperformed buy & hold. The drawdown & risk/reward were better since you could always count on dodging the bears, but you got nibbled to death by whipsaw ducks much of the rest of the time. As long as the recession warnings are reasonably accurate, this will let you avoid the ducks and still dodge the bears.
And I recently realized there’s another benefit to the reliable bear-avoidance of trend following that I haven’t seen mentioned anywhere before: if you know you’re safe from bears, then you don’t need any stinking bonds. Especially with the lousy bond returns these days, getting rid of bonds alone should boost your portfolio returns way more than any trend following losses. That alone is probably enough to make even full-time trend following outperform buy & hold. Time for me to run some more simulations.
paul.novell@gmail.com · April 30, 2017 at 5:11 am
Rick, you absolutely right that less signals, lower turnover, less false positives, etc are lower with a recession based system. That is one of its strongest points. I also agree with your second point. At the minimum having a reliable trend following system allows one to allocate less to bonds which in today’s environment have lousy expected real returns.
Paul
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