Signs of Economic Weaknesses surfaced

Recent reports of weaknesses in the US economy raised concern that the world economy could soften significantly in the later part of 2010 or early 2011. As noted by an article entitled "It;s more than just a scare" by Comstock Partners, the followings weaknesses are highlighted:
1. ISI's weekly company survey has been trending lower since peaking in April;
2. ISI retail survey dropped by 4.8% last week or 20% since the April peak;
3. Employment's survey dropped 3.1% last week or 7% from recent peak.
4. Homebuilders' survey at 4 months' low; and
5. Transportation survey declined in the past 4 weeks.

The above is consistent with the ECRI weekly leading indicators where the latest smooth growth rate is minus 5.7%, a level that had led to the last seven recession & was only wrong once. See the ECRI weekly index below.


Chart 1: ECRI index as at June 24, 2010 (Source: Rubbernet)
[Note: ECRI index is in blue. The red line is the Sicom TSR index.]

Another indicator which is closely watched by economists is the Aruoba-Diebold-Scotti real-time business conditions indicator maintained by the Philly Fed. We can see that this indicator is rolling over again.

Chart 2: Aruoba-Diebold-Scotti Business Conditions Index as at June 24, 2010 (Source: Philadelphia FED)

Finally, we can see that commodity prices as reflected by the CRB index is dropping, with a downtrend clearly formed. See Chart 3 below. In addition, we can see that BDI has also formed a downtrend. See Chart 4 below (Note the lower 'high' and lower 'low').


Chart 3: CRB index's daily chart as at June 24, 2010 (Source: Stockcharts)



Chart 4: BDI's daily chart as at June 24, 2010 (Source: Investment Tools)

Based on the weakness on the economic front, we must be cautious about putting too much money in the stock market.