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Boom-Bust Barometer Biffs Badly

Yardeni’s Boom-Bust Barometer (BBB) pitched to 18-month lows last week (dotted red line below).

The BBB is comprised of the CRB industrial raw materials spot index divided by the four-week average of initial unemployment claims. It’s a fairly reliable stock market indicator which makes sense seeing as how rising raw material prices and a strengthening labor market typically equate to an environment that’s supportive of stocks, and vice-versa.

The BBB turned over and trended lower in the lead up to the 2015 market sell-off as well as the equity rout last Fall. Of course, there’ve been a few false signals such as the spike lower in 17’ but which was quickly reversed.

We’ll have to keep an eye on the BBB in the weeks ahead. The net-bullish sentiment reversal we saw recently in the AAII survey, along with the short-term oversold conditions of certain sectors (see semis), has likely bought this up-swing in the market a bit more time.

Looking past a few weeks out though I think it’s odds on we see another leg down in the market. Between the upcoming weak seasonals, decelerating global growth, escalating trade conflict, and stubbornly high consensus earnings estimates for Q2 onwards, there’s not a lack of catalysts to cause another major dislocation.

This company looks cheap, that company looks cheap, but the overall economy could completely screw it up. The key is to wait. Sometimes the hardest thing to do is to do nothing. ~ David Tepper

It’s a good time to show some prudence, derisk some, and wait for another dislocation to buy in again.