I have been focusing on providing a series of in-depth, educational articles to provide a foundation for future commentary, but the economic news was so bad last week that I felt compelled to address the current market environment.  The following post provides an overview of the major economic releases from last week as well as my current summary market indicator score.

Economic Data From the Week Ending 6/1/2012

Here is a partial list of the US economic reports from last week:

Consumer:

• Consumer Confidence 64.9, 4.5 below expectation, 3.8 below prior month
• Personal Income 0.2%, 0.1% lower than expectation, 0.2% lower than prior month

Employment:

• Challenger Job cuts +66.7%, no expectation provided, 55.5% higher than prior month
• ADP Employment Change, +133K, 24K below expectation, 20K higher than prior month
• Initial Unemployment Claims 383K, 15K higher than expectation, 10K higher than prior week
• Non-Farm Payroll 69K, 81K below expectation, prior month revised lower by 38K
• Non-Farm Private Payroll 82K, 86K below expectation, prior month revised lower by 43K
• Unemployment Rate 8.2%, 0.1% higher than expectation, 0.1% higher than prior month
• Hourly earnings 0.1%, 0.1% lower than expectation
• Average workweek 34.4, 0.1 lower than expectation, 0.1 lower than prior month

Housing:

• Pending Home Sales -5.5%, 6.1% below expectation, 9.3% below prior month

Business & Manufacturing:

• Chicago PMI 52.7, 4.3 below expectation, 3.5 below prior month
• ISM Index 53.5, 0.5 lower than expectation, 1.3 below prior month

Overall Economy:

• GDP second estimate 1.9%, 0.1% below expectation, 0.3% below initial estimate

The source for the above economic data was www.Briefing.com.

In almost every case, last week's economic data came in worse than the market's expectation.  In addition, the trend was consistently negative relative to the prior period, suggesting that the US economy is slowing.

Summary Market Indicator Score

While it is useful to look at individual economic reports and technical indicators, it can be difficult to combine all of that data and form an objective, consistent appraisal of the overall economic environment.  For that reason, I calculate a summary market indicator score, which combines the bullish or bearish readings from 34 separate data series.

The bullish and bearish readings are based on intermediate and long-term technical indicators, oversold and overbought oscillators, relative strength ratios, market breadth statistics, proprietary trading signals, various economic data series, mutual fund flows,  Economic Cycle Research Institute's (ECRI) leading indicator series, and the commitment of traders data.  I calculate a weighted average of the readings for each data series to come up with a single score that falls between -100 (max bearish) and +100 (max bullish).

As of June 1, 2012, the summary market indicator score was -32.6, which is obviously bearish. I do not use this score directly in my trading strategies.  Instead, I use the score to provide a consistent, unbiased reading on the direction of the economy and the market.

The market is currently oversold (making the indicator score less negative), which could lead to a short-term rebound in equity prices, but the summary market indicator score of -32.6 is troubling, especially in light of the ongoing problems in China and Europe.

I mentioned the Economic Cycle Research Institute (ECRI) above.  For those of you who are unfamiliar with ECRI, they are one of the foremost experts on the business cycle.  They provide a complete history of their weekly leading indicator series for free on their website.  The ECRI is currently forecasting a recession in the US, which they expect to begin in the middle of 2012. I encourage you to visit their website and review their track record and forecasting methods.

Last week was a very ugly week and there may be more clouds on the horizon

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Brian Johnson

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