Technically Speaking: Sell Today? Risk Vs. FOMO

As noted, the economic data is also deteriorating markedly in recent weeks as shown in the latest GDP NowCast from the Atlanta Fed.

Of course, if you have been reading our missives, this drop in the forecast was already evident by the sharp decline in our composite EOCI index.

(The index is comprised of the CFNAI, Chicago PMI, ISM Composite, All Fed Manufacturing Surveys, Markit Composite, PMI Composite, NFIB, and LEI)

As shown, over the last six months, the decline in the LEI has been sharper than originally anticipated. Importantly, there is a strong historical correlation between the 6-month rate of change in the LEI and the EOCI index. The downturn in the LEI predicted the current economic weakness back in July of 2018 and suggests the data will likely continue to weaken in the months ahead. As of January, the 6-month percentage change was at ZERO and will likely go negative in the next quarter.

The next chart is the EOCI index versus GDP. As we have noted several times previously, the bump in economic growth was from 3-massive hurricanes and 2-devastating wildfires in late 2017. The effect of those natural disasters has quickly dissipated as expected and GDP growth, which is a lagged indicator, will quickly follow.

But despite the underlying economic and fundamental data, the markets have surged back to extremely overbought, extended, and deviated levels.

The chart table below is published weekly.

You will note that with the exception of bond prices, every market and sector is more than 5% above its 50-day moving average and year-to-date performance is pushing more historic extremes both in price and in extreme overbought conditions.

Those overbought conditions are more prevalent in the chart below. On virtually every measure, markets are suggesting the fuel for an additional leg higher in assets prices is extremely limited.

The markets are not immune to the “laws of physics.” While the price action is indeed bullish in the short-term, the shorter-term moving averages act like “gravity” on prices. Given the current extension and deviation above the 50-dma the odds of a pullback, before a continued advance, is a high probability.

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Lance Roberts is a Chief Portfolio Strategist/Economist for  more

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