September 19, 2011, 1:48 PM ET.
Stock-ECRI Disconnect Suggests More Downside.
By Mark Gongloff
Unlike her former colleague David Bianco, Bank of America-Merrill Lynch’s technical analyst Mary Ann Bartels has been fairly downbeat on the stock market lately. She’s been right so far. Unfortunately, she’s also still downbeat.
The balance between QE and Treasury supply will begin to shift in July. The underlying bid it has provided for stocks and Treasuries will begin to fade.
This report tells why, and what to look for in the data and the markets. GO TO THE POST
In a new note, she writes that “there is a 50% probability that the S&P 500 tests 985-910,” which would be at least a 17% decline from where the index is this afternoon. Gulp.
She also addresses questions she’s heard from a lot of investors, apparently, about how much this market mirrors last year’s market, when stocks had an ugly summer but then plowed ahead in September, the first leg of a big QE-fueled rally.
She doesn’t see the parallels. One interesting note is that she doesn’t think the ECRI’s weekly leading index of conomic indicators is confirming the recent rally in stocks (which did not carry over into today). Last year, in contrast, the ECRI index confirmed the rally in stocks:
In September 2010, the ECRI Leading Indices confirmed the rally off the summer lows and the breakout from the base in the S&P in mid September.
In our view, this calls into question the rally for the S&P 500 and is a bearish sign.
The ECRI isn’t giving away its secret sauce, but I’m betting there’s some stock-market component to its leading index, so some of the stock-ECRI comparison is self-fulfilling. On the other hand, you can see some differences between the two. It bears watching, which is another reason why we track the ECRI index for you every week.