Macro Index Model

Smart Money Confidence is a model that aggregates indicators reflecting sentiment among investors that tend to use the stock market to hedge underlying positions. Or, they're just contrarian investors who prefer to sell into a rising market and buy into a declining one.

Time Frame: Long-Term | Update Schedule: Monthly | Source: SentimenTrader

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Construction:

The U.S. stock market and U.S. economy move in the same direction in the long term. Hence, big 30%+ declines exist within the context of macro (economic) deterioration. Macro doesn’t necessarily deteriorate before a 30%+ decline begins.

  1. Sometimes macro deteriorates before a 30%+ decline begins.
  2. Sometimes macro deteriorates after a 30%+ decline begins.

However, the key point is that the bulk of the 30%+ decline occurs after macro has deteriorated significantly. Macro deteriorates from time to time, which is normal during the ebb and flow of an economic expansion. To differentiate “temporary slowdowns” from real problems, we look for SIGNIFICANT macro deterioration. Our Macro Index combines 11 diverse economic indicators to determine the state of the U.S. economy right now.

  1. New Home Sales
  2. Housing Starts
  3. Building Permits
  4. Initial Claims
  5. Continued Claims
  6. Heavy Truck Sales
  7. 10 year – 3 month Treasury yield curve
  8. S&P 500 vs. its 10 month moving average
  9. ISM manufacturing PMI
  10. Margin debt
  11. Year-over-year headline inflation

As you can see, this index leans towards housing & the labor market. Housing indicators are extremely useful as leading economic indicators, and there are plenty of academic papers that explain why. Labor market indicators are very timely for calling recessions, with few false signals. Stock market investors should be bullish when the Macro Index is above 0.7, and bearish when the Macro Index is below or equal to 0.7

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