John Hussman: All of the Above
Market internals remain broken here. That may change, and it might even change soon. Until it does, we would be inclined to tread carefully, because this may be the highest level investors will see on the S&P 500 for quite some time. Choosing between potential catalysts - credit strains in China, the risk of disappointing earnings, or economic weakness, the incoming data is consistent with one conclusion: all of the above.
On the economic front, I noted last month that broad coincident and leading measures of economic activity continue to slump (employment is decidedly a lagging economic indicator), with the main bright spot being a jump in the Chicago Purchasing Managers Index that diverged significantly from other measures. As I noted at the time (see Following The Fed to 50% Flops), “When we plot ‘outliers’ (where the Chicago PMI deviates from the average of the other surveys), against subsequent changes in the Chicago PMI, what results is a clearly downward-sloping scatter, meaning that positive outliers, as we presently observe, are typically corrected by subsequent disappointments in the Chicago PMI. Conversely, however, outliers in the Chicago PMI are typically not related to subsequent positive surprises in the other indices.”
On Friday, the June Chicago PMI was reported. Reversing the May surge from 49.0 to 58.7, the index dropped back to 51.6. This was the largest monthly drop in four years. Both production and new orders declined, and order backlogs slipped into the deepest contraction since September 2009.
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