Reading the Macro Tea Leaves

This blog emphasizes a top down, macro approach to investing, so we’re always on the lookout for good information to help forecast market direction. Certainly we rely on technical (internal to the market) data, but also study fundamental (external to the market) data. Doug Short has become one of my go-to sources for good macro information. The guy was an English professor, but his careful market research and outstanding charts provide useful tools for our investing toolkit. His site has been added to our blogroll.

Today Doug has another fine article on the Consumer Metrics Institute’s Growth Index. I am always looking for leading indicators that actually lead market moves, as opposed to the many trailing indicators which dominate the news headlines. Once that stuff hits the headlines, the market has already priced it in. The edge of the CMI’s index appears to derive from the timeliness of its collection and reporting.

Of course we should always maintain a healthy skepticism, weigh all available evidence, and exercise judgment. That being said, at first glance this looks like a useful forecasting tool. If it turns out to be accurate, it appears to be projecting a second half dip into recession, adding support to the deflationary stance we are taking in our long term outlook (today’s trailing data: May CPI slightly negative, core up 0.1%, initial UE  claims up).

Looking back over the last 18 months, there is a good lesson in macro investing. The market bottomed and began to turn when the economic news was still terrible. As the improving economic news began to circulate, the rally stalled. Perverse, maybe, but that’s how the market works.

Lesson: the “smart money” gets in early and out early. If you trade on the headlines you will always be late, and your portfolio will underperform.

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