September 25, 2012 at 09:29 AM EDT
Was CFNAI what Fed saw coming that prompted its aggressive action?
Tuesday, September 25, 9:25 a.m. It was reported yesterday that the Chicago Fed’s National Business Activity Index (CFNAI) fell in August, and sharply, from –0.12 in July to –0.87 in August. Its more important 3-month m.a. fell from –0.26 in July to –0.47 in August, its sixth straight negative reading. A reading below –0.70 for [...]

Tuesday, September 25, 9:25 a.m.

It was reported yesterday that the Chicago Fed’s National Business Activity Index (CFNAI) fell in August, and sharply, from –0.12 in July to –0.87 in August.

Its more important 3-month m.a. fell from –0.26 in July to –0.47 in August, its sixth straight negative reading. A reading below –0.70 for the three-month m.a. is considered an indication that the U.S. economy has entered a recession. Now with six straight negative readings, it’s been heading in the recession direction, and at –0.47 is getting too close for comfort.

Although unfamiliar to most investors, the CFNAI is considered an important economic indicator since the Fed calculates it from a broad range of 85 individual economic reports and conditions. Fifty-nine of the 85 indicators made negative contributions to the index in August. And of those that improved from July, 12 were still at negative readings.

Or perhaps it was not just concern about the slowing U.S. economy that prompted the Fed to act in spite of signs of improvement in the housing industry.

Perhaps it was information like this chart showing the collapse of economic growth globally.

Global Growth

The chart is from Morgan Stanley, and is featured on Business Insiders this morning.

Which side will be right.

We’re in one of those periods of an unusual divergence between the sentiment of individual investors and the so-called ‘smart money’.

We’ve been noting since the June low how investor sentiment, bearish at the June low, expecting further decline, became increasingly bullish on the ECB and the U.S. Fed promises they would come to the rescue if needed. Markets around the world surged up on those hopes from the June low.

But usually savvy corporate insiders not only did not take part, but sold into the rally at an unusually aggressive pace.

Here’s another group of usually savvy operators, hedge funds, that also went the other way. So far it’s been embarrassing for them as they are experiencing a bad year.

The following chart from Bloomberg, Factset, and Deutsche Bank, clearing shows the divergence since June between the buying of investors and the selling of hedge funds. The dark blue line shows the activity of hedge funds, and the light blue line shows the surge in the S&P 500 in spite of the selling by insiders and hedge funds.

Equity long-short hedge fund positioning

And now Duetsche Bank is reporting that in the last two weeks, after the ECB and FOMC actions, underweight positions remain the strategy of hedge funds, while, as I noted in Saturday’s blog, the four-year outflow of investor money out off equity mutual funds has reversed dramatically to inflow.

Interestingly, Deutsche Bank notes that this is opposite to the bullish reaction of hedge funds after QE1, QE2, and ‘operation twist’, when they piled into equities helping drive the market higher.

So hedge funds, like corporate insiders, disbelieved the June rally and sold into it, and do not expect QE3 will be positive for equities, while investors piled into the market from the June correction low on hopes the worsening economic conditions would force the ECB and U.S. Fed to take action, and now that actions have taken place are confident they will create rallies like QE2 and ‘operation twist’.

Who will be right this time, insiders and hedge funds again, or newly confident investors who have finally reversed four-years of pulling money out of equities throughout the bull market, to pouring money in? 

To read my weekend newspaper column click here: If You Like QE3 But Stock Market Makes You Nervous – Buy Gold! Sept. 22.

Subscribers to Street Smart Report: The next in-depth Markets Signals and Recommendations Report will be out tomorrow in your secure area of the Street Smart Report website.

Yesterday in the U.S. Market.

Another low volatility, light volume day. The Dow traded in a narrow range of just 80 points from its intraday high to its intraday low, with only 0.6 billion shares traded on NYSE.

The market was up most of the day, but sold off in the last ten minutes or so to close the Dow down 20 points.

The Dow closed down 20 points, or 0.2%. The S&P 500 closed down 0.2%. The NYSE Composite closed down 0.3%. The Nasdaq closed down 0.6%. The Nasdaq 100 closed down 0.6%. The Russell 2000 closed down 0.4%. The DJ Transportation Avg. closed up 1.0%. The DJ Utilities Avg closed up 0.9%.

Gold closed down $5 an ounce at $1,768 an ounce.

Oil closed down $1.01 a barrel to $91.88 a barrel.

The U.S. dollar etf UUP closed up 0.2%.

The U.S. Treasury bond etf TLT closed up 0.8%.

Yesterday in European Markets.

European markets closed down again yesterday. The London FTSE closed down 0.2%. The German DAX closed down 0.5%. And France’s CAC closed down 1.0%. Greece closed down 2.8%. Italy closed down 0.8%. Spain closed down 1.2%. Russia closed down 0.3%.

Asian Markets were down Sunday night and mixed last night.

The Asia Dow closed down 0.4% Sunday night, and down 0.1% last night.

Among individual markets last night:

Australia closed down 0.3%. China closed down 0.2%. Hong Kong closed up 0.1%. India closed up 0.1%. Indonesia closed up 0.6%. Japan closed up 0.2%. Malaysia closed up 0.2%. New Zealand closed up 0.4%. South Korea closed down 0.6%. Singapore closed down 0.1%. Taiwan closed down 0.4%. Thailand closed up 0.2%.

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Markets This Morning:

European markets are off earlier lows. The London FTSE is now up 0.2%. The German DAX is up 0.2%. France’s CAC is up 0.2%

Oil is up $.75 barrel at $92.68

Gold is up $5 an ounce at $1,772.

This Morning in the U.S. Market:

This week is a quite heavy week for potential market-moving economic reports. They include the Chicago Fed’s National Business Index, New Home Sales, Durable Goods Orders, Chicago PMI, Consumer Confidence, etc. To see the full list click here, and look at the left side of the page it takes you to. The quarter’s quadruple-witching expirations also take place on Friday.

Yesterday’s report was that the Chicago Fed’s National Business Index fell further in August, dropping to –0.87 from – 0.12 in July. More ominous, the more important three-month moving average fell from –0.26 in July to –0.47 in August, its 6th consecutive negative reading. And the Dallas Fed’s Mfg Index improved in September, but remained negative coming in at –0.9 versus –1.6 in August.

This morning’s report so far was that the Case-Shiller Housing Price Index shows U.S. home prices rose in July for the 4th straight month, and are at their highest levels in almost two years.

Still to come are Consumer Confidence, and the Richmond Fed Mfg Index, both of which will be released at 10 a.m.

Our pre-open indicators are positive.

Our Pre-Open Indicators:

Our pre-open indicators are pointing to the Dow being up 35 points or so in the early going.

To read my weekend newspaper column click here: If You Like QE3 But Stock Market Makes You Nervous – Buy Gold! Sept. 22.

Subscribers to Street Smart Report: The next in-depth Markets Signals and Recommendations Report will be out tomorrow in your secure area of the Street Smart Report website.

I’ll be back with the next regular blog post on Thursday morning at 9:25 a.m.

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