Sunday, March 10, 2013

Macro Surprises Have Become Favorable

In the past week, macro surprises in the US have been favorable. As a result, the Citigroup Economic Surprise Index (CESI) has crossed back above zero after having been negative from late January.

There is an exhaustive post on what this Index means here. This is the bottom-line: According to JPM, the last 7 times that CESI went negative, over the next 3 months, the $SPX had average upside of just 1% versus an average downside of 8%.

No one indicator is perfect; there is a clear possibility that CESI sent a false negative in January. The downward trend in EPS revisions and global macro data (all detailed here) would seem to make this unlikely, but you never know. For now, we will give CESI the benefit of the doubt and assume that the trend is higher.

A word of caution: CESI crossed negative in late 2009, made a shallow dip, then turned positive again at the end of the year. See green arrow in first chart below. It turned to be a fake out. In January 2010, CESI went negative a second time and SPX dropped 9% (second chart). Prudence therefore suggests giving time to confirm the recent move back above zero.