Economic Surprise Index Surprises. So What Does It Mean?

George Brooks |

Heads up! There are two interesting surveys that investors should pay attention to: The Bloomberg Economic Surprise Index and the Citigroup Economic Surprise Index. Both indicate the economy is growing better than economists’ expectations. Based on dozens of economic indicators compiled by various private and government sources, the Bloomberg Index has rebounded from a minus 0.42 in July to a minus .06 last week.

The Citigroup Index has rebounded to 49.4 from a minus 65.3 in mid-July, all suggest business, as reported, is better than expected. Contributors to the improved index were – consumer confidence, auto sales and purchases of existing homes. What does all this mean?

Investor’s first read - an edge before the market opens
DJIA: 13,328.85
S&P 500: 1428.59
Nasdaq Comp.: 3044.11
Russell 2000: 823.09
(Monday, October 115, 2012 (9:13 a.m.)

Well, analysts don’t like to look like they are missing the mark – hard on the ego and not great stuff come time for their review, so they’ll revise their projections, in this case upward. Money managers and other investors will respond accordingly – buy. I studied a comparison of the S&P 500 and the Citigroup Surprise Index and found that turns in the Surprise Index led turns in the S&P. This relationship is somewhat of a judgment call, easier to read in hindsight, not easily quantified, so it is best used in combination with other factors (as any one indicator).
Nevertheless, it is a “heads up!"

What about the election where a key topic is the economy? This indicator is much too complicated for the average voter who still doesn’t understand that four years ago we came within a whisker of a total global meltdown, which was averted by a last minute scramble by the former and present administrations to rescue the banks and auto industry, et al.

Q3 EARNINGS:
Corporate earnings for Q3 will continue to flow in coming weeks. Expectations are that they will be down. The question is, has the stock market adequately discounted this decline? I suspect it has, since the ratio of companies expecting earnings to come in lower than estimates is 4.3 times greater than those that are expected to “beat,” compared with Q2 which was a 3.6 negative to positive, yet the stock market persisted upward after the Q2 reports. So far, two-thirds of the 33 S&P 500 companies reporting have exceeded projections by an average of 4.1%*

FISCAL CLIFF:
Part of the current economic slump is due to a global slowdown, but part is due to the gridlock in Congress and uncertainty of the consequences of $100 billion of automatic spending cuts and $500 billion of tax increase if the fiscal cliff is not avoided December 31. Consumers and businesses are holding back on spending.

Common sense says Congress will do something to avoid a plunge over the cliff. It has some wiggle room, and may find a way to postpone the decisions into 2013, but there again you have an extension of “uncertainty” – bad for the economy.

One important point to note here : Post-Election years are historically bad ones for stock prices.**
Why?

Because administrations use this year to do most of the unpopular things that need to be done, thus paving the way for 3 or 2 years to make things right for the next presidential election. Bottom line: 2013 may be rough and tumble, nasty, unsettling, painful, pain-in-the-butt, hard on your portfolio.

CONCLUSION:
The market should open higher with resistance starting at DJIA 13,420 (S&P 500: 1442). The market is off 3.1% in 6 days, some money managers will be buying to take advantage of lower prices, even though they know prices can go lower.
Odds favor lower prices without unexpected news. I see the possibility of DJIA 13,195 (S&P 500: 1414) near-term. Much depends on this week’s reports and/or a political surprise regarding the fiscal cliff.

ECONOMY: BIG week !
We have a broad base of indicators coming this week, which may give us a clue about whether the economy is continuing to weaken, or stabilizing. Granted, these are reports covering activity a month or more ago, but at some point will flash a trend or change.

MONDAY:
Retail Sales (8:30) – Up 0.9% in August after a 0.6% gain in July. Auto up 1.3%. Gas prices big contributor due to spike in prices which may not last – depends on Mid-East tensions.
Empire State Mfg Svy (8:30) – Continued its plunge in September to a minus 10.41 from 5.85 in August. New Orders dropped more.
Business Inventories (10:00) – Business inventories rose 0.8 in July after a rise of 0.9 in June, however inventory/sales ratio slipped to 1.28.0.7

TUESDAY:
Consumer Price Index (8:30) – Rose 0.6% in August after no gain in July. The CPI excluding food and energy was up only 0.1%. Oil spiked 5.6% after a drop of 0.3% in July.
Industrial Production (9:15) – Dropped 1.2% in August after a 0.5% increase in July. Capacity utilization dropped to 78.2% from 79.2%.
Housing Market Index (10:00) –The NAHB housing market index rose 3 points in August to 40, the 5th straight gain. Big concern for builders includes a tight market and lack of building lots.

WEDNESDAY:
Housing Starts (8:30) – Rose 2.3% in August after a drop of 2.8% in July. Current pace is 750 million units, up 29.1% from a year ago.

THURSDAY:
Jobless Claims (8:30) –Dropped 30,000 in the October 6 week to 339,000 bringing the 4-week average down 11,500 to 364,000. Possible distortion here, we will see Thursday when we get revised numbers.
Philadelphia Fed Svy (10:00) –Improved to a minus 1.9 in September from minus 7.1 in August. New orders were positive.
Leading Indicators (10:00) –Dropped 0.1 % for the 3rd contraction in 5 months. A decline in ISM new orders had the greatest impact.

FRIDAY:
Existing Home Sales (10:00) – Jumped 7.8% in August to an annual rate of 4.82 million – all regions participating.

FACEBOOK (FB - $19.75):
FB slipped briefly below $20 late yesterday, then rebounded on increased volume. It is struggling to hold above $19.80 where it attracted buying September 26. A break below that level raises the possibility it will test its IPO low of $17.55 posted on September 4.
This is one of those situations that appeals to those guys/gals who buy for the long-haul – 3 to 5 years, so some buying can be expected here on down. Since a lot of holders have short-term losses, it may be a candidate for tax-selling before year-end – additional pressure.

Today: FB trying to stabilize above $19.50. Stock has attracted some buying, but buyers must get more aggressive to turn it up here. A move above$20 on increased volume is needed.

I don’t own, nor have I ever owned FB. Generally, I don’t recommend or comment on individual stocks. I started covering FB technically after its IPO because on May 21, I felt at $34 it was very vulnerable in face of all the misunderstanding and hype. I warned of a drop to $24-26, which it did shortly thereafter. Following a rally back into the 30s, FB dropped into the low 20s where on August 2, I forecast a low of $16.88. On September 4, it hit $17.55, its low since its IPO at $38.

George Brooks
*Bloomberg.news
**Stock Trader’s Almanac
………………………………………………..
The writer of Investor’s first read, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

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