The U.S. is already in a recession according to Societe Generale’s bearish analyst Albert Edwards.
Earlier this month Edwards said companies could see their incomes drop 30 – 40 per cent because of the recession, and that the S&P 500 could see its index halved to 666 points.
And he is basing this on a decline in analyst optimism that is a good leading indicator of economic activity:
“Regular readers will know that we have always followed analyst optimism closely (optimism here defined as the percentage of analysts EPS forecast changes that are upgrades). We have shown previously that it is not the level of analyst optimism that is important for the equity market, but the change in optimism. Somewhat surprisingly we have found that the change in analyst optimism tends to be a very good leading indicator of economic activity (it mirrors almost exactly the OECD and Conference Board leading indicators), but it is published on a far more timely basis, and more importantly it is not subject to revision in the way the economic data and leading indicators are.
Hence we note that the aggregate monthly analyst optimism data has slid below the previous lows of last year and the year before, to the sub-40% mark. This has taken the 6-month change in optimism back into negative territory, which is beginning to drive the equity market back into bear market territory.”
This chart shows the 6-month change in optimism is in negative territory and is pushing stocks back into bear market territory.
Photo: Societe Generale
Edwards also said the S&P is on the “verge of an ultimate death cross.” The death cross is when the 50 day simple moving average (SMA) moves below the 200 day SMA. But a monthly death cross that considers the 50-month SMA and 200-month SMA is more significant. This is because 50 months is roughly the length of an election cycle or market cycle, while 200 months is about the length of a secular cycle.
Edwards explains that currently, the 50-month moving average is at 1152 and the 200-month average is at 1145.
“The Trend blogspot tries to make some sense of this very rare event. They note that the averages came close to crossing in 1978 towards the end of the 1965-82 secular bear market, but just held. By contrast Japan suffered a monthly death cross in 1998 and 14 years later we are still in the firm embrace of the bear. Watch this space.”
But a death cross isn’t always a bad thing, especially if it is quickly neutralized, according to The Trend blogspot:
“The S&P 500 is very close to undergoing a monthly death cross. The real question is, are we closer to the beginning of this secular bear cycle or closer to the end? If we can answer that, then we can answer whether this monthly death cross will be something to heed.”
Time will tell.
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