Clarity, Conviction, Consensus
The theme I have been discussing lately are the 3 C’s: Clarity, Conviction & Consensus:
1) Clarity: Right now, there is none. By our metrics, we are not at a major bottom. Nor can we say that the data supports the argument that we are at or near a top. Indeed, we are now more than 15% away from recent highs.
Nor are we in any sort of trend. There is no clear momentum in any direction.
And the prior trading range of SPX 1041 to 1170 is now decisively broken. So the most we can say is that we might be in a new trading range, from 975- 104o.
2) Conviction: The street fight between bulls and bears is notable for the lack of real conviction amongst the players. The bears have had the upper hand for 2 months, yet we don’t see the shorts pressing their bets.
The bulls argue that earnings are good, companies have clean balance sheets, and growth is supposed to slow after the initial post recession surge. Yet they don’t seem to back up their arguments with cold hard cash. Some Value guys argue stocks are cheap, but they recall getting burned in 2008 the last time we saw that. They seem to be sitting pat.
Yes, its the Summer, and trading should slow down — but the abysmal volume tells us there is little institutional interest in making any commitments to equities and even less enthusiasm from Main Street.
3) Consensus: I cannot recall the last time a) so many people were projecting a recession; b) the crowd got it right.
There seems to be a consensus that a double dip is likely. Most everyone is arguing that ECRI’s weekly leading index supports a double dip. Everyone, that is, except for ECRI themselves.
The recessionistas — Hussman and others — argue from a sample set of 7 recessions, and while I do not disagree with using historical data, we are constrained by having a mere century’s worth. Its better than nothing, but only marginally so.
The worst thing about being mortal is that we won’t be around 1,000 years from now. By then, we will have a sufficient data set to draw better supported conclusions as to what, if anything, historical data projects about markets and the economy.
Until then, exercise, watch your cholesterol, and wait for more clarity.
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July 1st, 2010 at 10:27 am
I prefer to watch small caps in downturns. Russell 2000 is in a downtrend, lower channel support is near 583-585. Any intraday touch of that number, and I will put on a trade for a bounce. I have no clear idea where the floor is in this funhouse, but I think it will have a big QME v.II logo printed on it when it’s found ;)
July 1st, 2010 at 10:33 am
There is no “clarity,” because no one wants to believe how terrible the numbers are, or we are all contrarians waiting to pounch on the next bounce.
July 1st, 2010 at 10:38 am
“There is no clear momentum in any direction”
Seriously? You have taken a calm analytical approach this morning but Mr Market seems to be in a bunch over the head and shoulders formation.
Plus the failure of the mythical PPT to arrive yesterday for their 3:30 checkup.
July 1st, 2010 at 10:40 am
The gold bugs and euro-shorts have also woken up grumpy.
It is not a good time to be long anything but inverse ETFs and BP.
July 1st, 2010 at 10:41 am
>> The worst thing about being mortal is that we won’t be around 1,000 years from now.
Stick around for the next 40 years, Barry, and you might change your mind about that.
July 1st, 2010 at 10:43 am
Er, that line was confusing. In a roundabout way, I was trying to imply that “immortality” medical technology might be available as soon as 40 years from now.
July 1st, 2010 at 10:44 am
I’ll throw in my tuppence worth:
Clarity: I think it’s fair to say that various leading(ish) indicators are suggesting a slow-down (some a double dip, some just a slow down) but there’s been little confirmation from the good (imho) real-time indicators (ADS, CFNAI).
Conviction: I’ve no real equity exposure, but it would take a move in the markets (because my shorts are through puts) or some confirmation from those real-time indicators for me to express my bearish opinions more significantly.
Consensus: Generally, from the people I speak with, they are more concerned with the things they can’t see than they believe in the things they can. That said, also from speaking to them, I don’t think their portfolios reflect this (especially in hedge fund world) – there seems to be more hope positions (both in terms of gross/net exposure and the type of names) than I’d expect.
July 1st, 2010 at 10:49 am
“The worst thing about being mortal is that we won’t be around 1,000 years from now. By then, we will have a sufficient data set to draw better supported conclusions as to what, if anything, historical data projects about markets and the economy.”
Cheer up – Ray Kurzweil is going to upload your consciousness into some computational dealie-blobber, so you’ll be able to invent a hundred thousand years of data and play with the sets all day long.
July 1st, 2010 at 10:55 am
Read Corey Doctorow’s short story “I, Rowboat.” It’s pretty funny and interesting. Not quite “insanely funny intellectual comedy,” but good enough to get the job done.
July 1st, 2010 at 10:56 am
“There seems to be a consensus that a double dip is likely.”
Double dip? Recession? What a laugh ask all the unemployed (several millions) if we ever left the recession to begin with. Ask the SMB if we ever left the recession to begin with. All we had was a bounce on the stock market fueled by the injection of cash via government intervention. This may have produced the illusion of “recovery” but deflation is still here and re-asserting itself. Moreover, I see the republicans cutting all social-economic supports (UE benefits) just to make sure democrats get crush in the midterms. This will remove even more cash from the consumers. I also see banks accelerating their foreclosure “inventory”. This means lower housing values and therefore lower consumer confidence. Welcome to the “malaise” presidency
July 1st, 2010 at 10:57 am
“Until then, exercise, watch your cholesterol, and wait for more clarity..”
for those interested in, a little more, ‘clarity’ –on cholesterol– see http://www.westonaprice.org/
http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Weston+A.+Price
some of our greatest ‘convictions’, held by such a ‘consensus’, are, merely, wrong-headed..
but, they (said, ‘convictions’) manage to sell, whether they be Statins, or Counterfeit Money-substitutes, as, but, two examples, a tremendous amount of Worthless G*rbage..
exercise (for the circulatory benefits), though, + a puss full of sunlight (for Vitamin D), are, still, good things..
http://www.thefreedictionary.com/puss try def. 2, #2
July 1st, 2010 at 10:59 am
BR offered:
And the prior trading range of SPX 1041 to 1170 is now decisively broken. So the most we can say is that we might be in a new trading range, from 975- 104o.
reply:
——————
975-1040: OK I’ll buy that for this week. ???-975 for next. This market’s going down faster than a crack wh@re.
July 1st, 2010 at 11:05 am
http://www.youtube.com/watch?v=l5dvJSlWbLc&feature=related
Young married couple in debt ever felt had?
July 1st, 2010 at 11:19 am
I bought TNA for the bounce at 33.20.
July 1st, 2010 at 11:21 am
“I cannot recall the last time a) so many people were projecting a recession”
Barry we’re in a depression, not a recession, and we never left said depression, we just spent a bunch of money we don’t have to pretend it didn’t exist!!!! Most of the clowns jumping on the “recession” bandwagon are the same clowns who said we are in a recovery three months ago. They’re full of garbage and just don’t want to look stupid; aka Nobel Laureate Paul Krugman.
July 1st, 2010 at 11:28 am
I’m not sure the numbers necessarily matter at this point on whether there MIGHT be a double dip. The economy is us. If enough people are convinced that a double dip is imminent, then a recession we will have.
While the banksters and hedge funds have an awful lot of money and can certainly influence macro to some degree, their assets still pale in comparison to the rest of us. If we the people (which is increasingly a global statement) pull back and save our pennies against a double dip, then we will have a self-fulfilling prophecy.
July 1st, 2010 at 11:31 am
There is also the fact that the bots comprise the bulk of the volume these days (and have for quite some time), so they can call a bottom whenever it suits their fancy to do so. I suspect they will allow this market to get modestly oversold (we’re not there yet), and then unleash a pretty good rally, with no reason behind it other than they can, and will make money by doing so.
But the bots can’t go for very long without feeding, so stay cautious as we wend our way lower. I doubt very much that we will test the 2009 lows in this move.
@Transor Z 10:55 am — thanks for the clue, but you didn’t provide a link (Cory releases all his stuff under the Creative Commons License, so it’s freely available — and he still manages to make a living from writing!)
here … http://www.flurb.net/1/doctorow.htm
July 1st, 2010 at 11:35 am
“I cannot recall the last time a) so many people were projecting a recession; b) the crowd got it right.”
Okay Barry, so we have the next 4 quarters of GDP in the range of positive 0.1 – 0.5% growth and you can proudly claim to have been right. The real point about double dip talk (even without a discussion of whether we ever undipped for a while), is that what you’re seeing is a “consensus” that the next several quarters of GDP will be below the recent, pitiful, stimulus and inventory restocking mirage that has been described as first “green shoots” and then as the nascent recovery.
July 1st, 2010 at 11:35 am
@Casual_Observer Says:
“If we the people (which is increasingly a global statement) pull back and save our pennies against a double dip, then we will have a self-fulfilling prophecy.”
Recession? What recession it is all in our heads. So by all means go ahead start spending your money, max out your credit cards, buy that vacation home. Do your patriotic duty.
July 1st, 2010 at 11:45 am
Robespierre,
You took my statement as broader than it was intended. I did not say that structural conditions do not warrant calling a recession, nor did I deny that we are in a hell of a fix (we ARE in a hell of a fix). All I intended to point out is that, regardless of structural components, we will take another leg down as a psychological matter. We can actually talk ourselves into a recession. That’s the only point I tried to make.
July 1st, 2010 at 11:52 am
@Casual_Observer Says:
“You took my statement as broader than it was intended.”
Sorry about that but I had just finished to read El Maestro saying “Ordinarily we’re saying that the stock market is driven by economic events, I think it’s more in the reverse.” when I read your post and well your sounded very similar in spirit …
July 1st, 2010 at 12:00 pm
Ah, that’s what you get for reading him. ;-)
July 1st, 2010 at 12:04 pm
Is this alleged consensus a fact? I don’t believe it is. If even you, Barry, don’t expect an imminent recession what reason is there to believe that there was a consensus regarding this expectation among all the ones on Wall St with their notoriously optimistic bias? A few weeks ago, projections for the GDP-growth this year were still revised upward. I rather suspect some wishful thinking at your side to have a rationale why the expectation was probably wrong. A rationale like it is expressed in this statement by you:
Regarding Hussman you say:
This is a little bit misleading. Hussman doesn’t base his recession warning on the reading of the ECRI growth index. So there is no point in saying that ECRI themselves say something else. ECRI missed to call the recession starting in December 2007. Hussman uses a set of various data, which all together have to fulfill certain criteria for a recession. In his recent weekly market comment he used the ECRI growth index merely as a proxy for the ISM Purchasing Managers Index based on a high correlation between the two datasets.
http://www.hussmanfunds.com/wmc/wmc100628.htm
That this wasn’t convincing, although the criteria used by Hussman have never failed within the available sample of recessions, because the sample has the size of only seven and doesn’t go back a thousand years, isn’t really a convincing counterargument. Probability calls are always based on samples and we have to use the data that are available. If for the last seven recession the criteria have never failed, it’s true that one can’t exclude the possibility that it fails this time for the first time. That would be a fail rate of 1 out of 8 then and put the probability of an imminent recession still over 80%. That is, if one takes all these recession as equals and doesn’t even consider that there had been favorable conditions for subdued recessions during the expansion of the credit bubble, whereas we likely are now in the phase of a dragged out debt deflation phase, which is rather unfavorable for economic expansion. You would have to make a counterargument, based on hard data, why the recession probability was still only 50% or lower, nevertheless. Instead, I see only counterarguments based on disbelieve and a reference to an alleged prevalent sentiment.
BTW: The Daily Growth Index of the Consumer Metrics Institute supports the high probability of a recession that is impending or has started already, as well:
http://www.consumerindexes.com/
These are totally independent data and they have nothing to do with the ECRI growth index at all either.
July 1st, 2010 at 12:04 pm
By the time it is clear, market will price in.
~~~
BR: To clarify — I meant by the time the data provides us with enough info to make a reasonably high probability call.
Not, “By the time its so obvious everyone has figured it out . . . “
July 1st, 2010 at 12:19 pm
From Bill Noble, GS:
Not a pretty picture: 1) In SPX a weekly close below 1040 sets up a head and shoulders top that is the mirror image of the head shoulders bottom made during late 2008 and early 2009.
2) Looking at the head and shoulders bottom from early 2009, I noticed that a breach of the neckline in July of 2009 resulted in a vertical move higher with NO retest of the neckline. As markets love symmetry, I would expect the same price action in reverse. A weekly close below a big Fibonacci number at 1014* will confirm that there will be no retest of 1040. Said differently, all the people who expect a bounce near term may not get that bounce until SPX hits 900.
3) Looking at the weekly chart of the move from 900 to 1000 in 2009, that move unfolded in a parabolic fashion. Given this observation, my concern is as follows: What goes up one way may go back down in exactly the same fashion. This thinking is also in line with the historical research showing clear risks of a ~10% decline.
* 1014 is the 38% retracement of October 2007 to March 2009 down move. In theory, once a market falls back below the 38% retracement of a big down move, it becomes reasonable to assume that the overall down trend will re-accelerate.
July 1st, 2010 at 12:39 pm
A recession implies that things will go back to they way they were…or close enough, soon enough.
In the Great Strath, “double dips” are merely rolling hills.
The worst thing about not being immortal is that Bokolis won’t get to stay this age (old enough to know almost everything, and young enough to still do it) forever (presumably, immortality affords that)…meaning I’m just about out of time to bag up <26 year old birds off my looks.
Bahhh, being a sugar daddy is probably simpler anyway, right guys?
July 1st, 2010 at 1:15 pm
Thanks Barry. You put things into great perspective when things are cloudy.
Funny how investors start caring about the minute to minute news and are desperate for any ring to grab for an advantage…thats when things are definitely not okay.
Still almost all cash? lol
July 1st, 2010 at 1:23 pm
Barry,
I would say rootles cosmopolitan makes quite valid points. I fully agree with him.
July 1st, 2010 at 1:44 pm
Are that really many people predicting a recession Or is it just many people you speak with/respect??
No investment bank is (JPM reduced their Q3 GDP forecast, to 3% today…that’s not recessionary)
Very few investment managers are (hello Bob Doll)
Perma-bears (or people who’s entire media appearances are based on them being negative, e.g. Taleb and Roubini) are and some smart analysts (Rosenberg, Hussman, Edwards, etc — though most have had a negative tilt in recent years. An accurate one, I’d add) are…
July 1st, 2010 at 1:49 pm
i wonder if Mr Market has priced in the coming austerity movements budgets and has decided that the economies of the world are about all tank?
July 1st, 2010 at 1:51 pm
With all of the bright contributors to this blog, no one has even mentioned the influence of the World Cup on market tilt. lol
July 1st, 2010 at 2:07 pm
BJ’s up huge today…didnt you talk BJ’s on Fast Money the other day as weak econ play?
if so, nice call!
Have a nice July 4th
JB
July 1st, 2010 at 2:09 pm
May 06,2010
“Walking Pneumonia” Contraction Ahead: The Information Missing from the BEA Q1 GDP Report
As you can see from the above chart the current consumer “demand” contraction event is unique: if there is a “second dip” it may very well be unlike anything we have seen recently. Instead of a “call-911″ type of event in 2008 or the “hiccup” witnessed in 2006, we may be seeing a “walking pneumonia” type of contraction that has legs.
Our data is significantly upstream economically from the factories and the products measured by the GDP, putting us far ahead of the traditional economic reports. Perhaps our data is too timely; we are so far ahead of conventional economic measures that our story generally differs (either
positively or negatively) from the stories being simultaneously reported by more traditional sources.
The indexes themselves can be found at http://www.consumerindexes.com.
July 1st, 2010 at 2:21 pm
“With all of the bright contributors to this blog, no one has even mentioned the influence of the World Cup on market tilt. lol”
Soccer – America’s Path To Socialism
http://www.youtube.com/watch?v=yBkbj_S3etY&feature=player_embedded
Before anybody blows a gasket, it is satire.
July 1st, 2010 at 2:25 pm
Doug Kass just called bottom:
http://twitter.com/DougKass
July 1st, 2010 at 2:32 pm
I’m sorry but I don’t see any type of “trading range”. I saw the market make a definitive top in April. The market action in March and April was characteristic of the typical short squeeze at a major change of trend. Then May and June were two of the worst months in modern history for equities.
How much more clarity do you need? I don’t think this is some goddamn mystery here….
July 1st, 2010 at 2:49 pm
I read Kass’ article on “Emotional Abuse.” What a load of crap. Blame this collapse on the Fed. They pumped up all risk assets with $1.5T in base money. Then they turned off the spigots and everything collapsed. Everyone is scratching their heads wondering why stocks are plummeting. Isn’t it obvious?
July 1st, 2010 at 3:12 pm
[...] all those negative factors weighing on the market, FusionIQ CEO Barry Ritholtz looks at the three C’s — clarity, conviction and consensus — to try to determine [...]
July 1st, 2010 at 4:09 pm
All these factors are negative, but the seeming 1.0 correlation among equities now makes them especially so.
July 1st, 2010 at 6:38 pm
Barry – even if one grants that consensus is for a double dip, consensus doesn’t seem to be pricing in the probable consequences of a double dip. A renewed recession would have negative implications for real estate prices, credit default rates, etc, putting more stress on an already severely weakened financial system, at a time when political will (and available firepower) for continued bailouts appears nonexistent. The consequences of a ‘garden variety recession’ here could well be more severe than what we’ve seen historically.
July 1st, 2010 at 7:14 pm
BR, who is this consensus you speak who are projecting a recession?
According NABE their economists “[b]oosted its expectations for growth in 2010 to 3.2 percent for real GDP from 3.1 percent in its February forecast. The panel is also predicting a 3.2 percent pace of real GDP growth for 2011, meaning a sustained two-year stretch in excess of the economy’s potential—or “trend’—rate of growth. The panel estimates the economy’s potential rate of growth at 2.8 percent over the next five-year period.”
http://www.nabe.com/publib/macsum.html
The only economists that I know who are forecasting a recession are bloggers and according to the Fed we should not listen to these people because they are not smart enough to know how the economy works.
July 2nd, 2010 at 1:33 am
[...] keen-eyed Barry Ritholtz at the Big Picture has his doubts. Consensus: I cannot recall the last time a) so many people were projecting a recession; b) the [...]
July 2nd, 2010 at 7:54 am
[...] Clarity, Conviction, Consensus – we're in too tough a spot right now to be making any determinations. (TBP) [...]
July 2nd, 2010 at 10:06 am
I agree with rootless cosmopolitan’s comments regrading you misleading comments on Hussman.
BR, for being a data driven guy, you are quick to dismiss the only data we have, the data that Hussman uses.
As Mish highlights here, the ECRI was late to the recession call last time. I would put more confidence in their their numbers than their opinions.
http://globaleconomicanalysis.blogspot.com/2009/10/look-at-ecris-recession-predicting.html
July 2nd, 2010 at 4:36 pm
3) Consensus: I cannot recall the last time a) so many people were projecting a recession; b) the crowd got it right.
There seems to be a consensus that a double dip is likely. Most everyone is arguing that ECRI’s weekly leading index supports a double dip. Everyone, that is, except for ECRI themselves.
You make your point as far as it directly states; however, if the consensus is that a double dip is likely, and a double dip is a semiotic misdirection signifying a non-entity, then there is nothing done. The double dip was a carload of paper towels stuffed into a ravine, a Potemkin Village of a recovery fed by FED and algos chasing and shearing 401-K’s tails to hold gravity in check until the paper dream/ story ran out. Take a deep breath; the little guy is stilling out this Plantation drama