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Soc Gen’s Economic Surprise Indicator



February 25, 2011 – Comments (0)

This is a very interesting study. I have talked about bullish sentiment surveys in the past, and by themselves will not help to determine a market top. From

Bullish Sentiment

There has been a lot of talk recently about massively bullish sentiment (including from me). It is true that all major peaks in the stock market have occurred on high bullish sentiment readings. However, simply because sentiment readings are high doesn't mean that we will have a peak.

As Guy Lerner likes to point out, it takes bulls to make a bull market: (see

Until proven otherwise, extremes in the sentiment indicators don't matter as "this time is different".  I never really believe that "this time is different", but that's what I have labeled those instances where prices lifted strongly despite the bullish extremes in sentiment.  The current rally has taken on a quality reminiscent of 1995, 1998/ 99, 2003 and 2009.  In these instances, it took bulls to make a bull market.

Ever since the April 2010 peak was taken out, I have been much less inclined to see bullish sentiment as an intermediate term contrarian indicator. I tend to see it as a coincident indicator. There will be a time in the future when other drivers are in divergence (such as analysts estimates compared to actual earnings) and this does eventually become a contrarian indicator again. But with short and intermediate term bullish macro and trends in place, I think this is simply a coincident indicator.

I still do think this is the case. I still think this is a bull market and bullish sentiment surveys are a coincident indicator right now, not a contrarian indicator yet. However, here is something else I wrote in the same post:

Earnings Growth (and more specifically how analyst estimates of growth correspond to actual growth) is just as important to the earnings themselves. The past few months I have been observing the unhealthiness in earnings growth (almost completely by margin expansion. Revenues and real final sales have not kept pace) and I still stand by the fact that this is unhealthy. But the market is as much psychology as it is fundamentals. And analyst estimates have largely been in line with actual earnings for the past few quarters (regardless of how those earnings have been generated). At the beginning of 2009 we saw earnings estimates that were even lower than actual earnings. For market tops we want to see analyst estimates that are much higher than actual earnings.

And the fact of the matter is that analyst estimates are still pretty much in line with actual earnings. And until a spate of uber-bullishness takes over the analyst community and earnings do not keep pace, then positive market trends are likely to continue.

And again, I don't think we are there yet. Earning estimates are still keeping in line with earnings, which are trends that we tend to see in the middle of bull markets, not at the ends.

However, Barry Ritholtz put up a similar but slightly unrelated study up regrading stock/bond ratios and economist expectations (not stock market analyst expectations).

I think this could be a signal for an intermediate term pullback. Again, I do not think this will be a crash, simply a mid rally correction / consolidation. In fact I think this will mark the beginning of the consoldiation period for the next several months (perhaps year or so) where the market consolidates gains and builds a base for the next leg of the cylical bull (which I think has several years to go).


Soc Gen’s Economic Surprise Indicator
By Barry Ritholtz - February 25th, 2011, 7:06AM

Alain Bokobza of the Société Générale Quant team, writes that their “Economic surprise indicator” suggests risky assets are now technically vulnerable:

    “After undergoing a massive rally since last September, risky assets are now technically vulnerable: SG Quant sentiment indicator is close to an all-time high, economic revisions have rarely such a high percentage of upgrades, equity volatility is at a four-year low, the Canadian dollar is dear versus the USD and lastly inflows into equities reached $8bn last month, led by “panic-buying.”

This  economic surprise indicator is a measure of the deviation of economic data surprises, calculated as the difference between figures released and figures expected by consensus. Global Equities relative to Global Bonds: 3-month performance of MSCI World Index (in US$, in total return) divided by Barclays Global Bond Index (in US$, in total return).

Economic Surprise Indicator

Bonds no longer expensive vis à vis equities

1 & 3: time to switch out of bonds into equities
2 & 4: time to switch out of equities into bonds

Don’t despair: correction of risky assets likely coming soon
Alain Bokobza, Roland Kaloyan, Arthur van Slooten, Philippe Ferreira
Multi Asset Snapshot, Société Générale Quant Group
Asset Allocation Strategy

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