August’s Boom/Gloom Index turns more cautious

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Merrill Lynch’s Bob Farrell was the doyen of sentiment analysts. He famously suggested that ‘bear markets have three stages – sharp down, reflexive rebound, a drawn-out fundamental downtrend’.

So far we have certainly seen the ‘sharp down’ period, and the blog’s new Boom/Gloom Index© seems to have signalled the current ‘reflexive rebound‘, with July’s Index correctly indicating that market fundamentals and sentiment would continue to diverge:

• The former remained neutral, as shown in the round-up of company statements, and fellow-blogger John Richardson’s Asian review.
• But sentiment remained very positive, as the financial sector claimed to “look through” current fundamentals to a more positive future outlook.

However, August’s Index suggests they may now be starting to realign. And this is supported by the 26% decline in the Green Shoots reading.

So far, investors have been willing to assume that the current restocking process is indeed becoming a real recovery. But if Farrell’s analysis is correct, they may soon start to demand more evidence to support this belief. The clear risk is that this would then lead markets to enter his next phase of ‘drawn-out fundamental downturn’.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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