CFNAI Index Suggests Financial system Is Slowing

Inside This Week’s Bull Bear Report

• CFNAI Index Suggests Financial system Is Slowing
• How We Are Buying and selling It
• Analysis Report – CAPE-5, A Higher Measure
• Youtube – Earlier than The Bell
• Market Statistics
• Inventory Screens
• Portfolio Trades This Week

February Weak point And The Outlook For March

Final week, we mentioned that continued bullish exuberance and excessive ranges of complacency can shortly flip into volatility. Over the earlier week, the market fell sharply following information of a possible viral outbreak in China and extra issues about tariffs from the Trump Administration. Whereas these have been the headlines that gained the market’s consideration, the truth was that the market was overbought and on a promote sign, setting the market up for pullback. The correction was not surprising, as mentioned three weeks in the past:

“The bullish bias is clear, as witnessed by the latest surge in retail cash flows into leveraged ETFs and speculative choices buying and selling. Nonetheless, as is all the time the case, each time buyers are crowded on “one aspect of the boat,” it’s usually an honest contrarian sign to be a bit extra cautious. Moreover, whereas there may be at the moment no proof of a catalyst for a correction, it’s price noting that we’re getting into into the seasonally weak a part of February.”

In different phrases, whereas the media scrambled to align causes with the sell-off, the correction was very a lot consistent with seasonal tendencies. Crucially, that sell-off has pushed investor sentiment to ranges usually equating to a lot deeper corrections. From a contrarian view, that excessive destructive sentiment, now mixed with oversold situations, offers a great base for a rally in March.

“Sentiment is approaching two customary deviations beneath its common stage. Such ranges are extra coincident with market bottoms than the start of a corrective cycle. I’ve labeled some occasions alongside the best way. The lesson is that headlines drive sentiment, and when sentiment turns into too destructive, as could be the case right now, such permits for rallies to kind.”

Right here Comes March

Moreover, March has a seasonal bias to the upside as we enter the top of the quarter and the final stretch of the seasonally sturdy interval of the yr. January, March, and April have probably the most substantial early-year returns, with March and April having the best win charges.

Does this imply the subsequent main bull market rally is about to start? No. Nevertheless it does counsel that there are such excessive ranges of destructive sentiment that promoting right now will seemingly be a mistake. Loss avoidance is without doubt one of the psychological elements that leads buyers to long-term underperformance. With market sentiment very destructive and changing into decently oversold, be affected person and watch for a tradeable rally to rebalance portfolio positions as wanted. For merchants, an honest tradable alternative is probably going within the close to time period.

Nonetheless, whereas there’s a potential for an honest tradeable rally over the subsequent month or so, we nonetheless count on elevated volatility this yr. We wish to reiterate utilizing rallies to rebalance danger and handle allocations as wanted.

The most recent readings from the CFNAI index are one purpose we stay cautious about our outlook.

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The CFNAI Index Suggests The Financial system Is Weakening

Current financial stories have proven a extra critical exercise slowdown, which we now have mentioned many instances in latest months. One indicator we watch carefully is the Chicago Fed Nationwide Exercise Index (CFNAI) which is arguably some of the essential and ignored financial indicators. Every month, economists, the media, and buyers pour over numerous mainstream financial indicators, from GDP to employment and inflation, to find out what markets will seemingly do subsequent.

Whereas financial numbers like GDP or the month-to-month non-farm payroll report usually garner the headlines, probably the most essential statistic, for my part, is the CFNAI index. Buyers and the press principally ignore it, however the CFNAI is a composite index of 85 sub-components and offers a broad overview of general financial exercise within the U.S.

For the reason that starting of this yr, the markets have struggled as they digest information of tariffs, issues over Synthetic Intelligence, and sticky inflation. Even with that pickup in volatility, as mentioned this previous week, analysts are very optimistic about earnings progress all through this yr and into 2026. These expectations are predicated upon continued strong financial progress. To wit:

“The chart beneath exhibits earnings’ long-term progress. Notably, analysts count on a document deviation above earnings’ long-term exponential progress development of $195/share and above the 6% peak-to-peak historic progress price.”

“The height-to-peak progress development is essential as a result of it’s the historic progress price of nominal GDP. Provided that company income, from which earnings are derived, comes from financial exercise, the correlation is logical. There are occasions when earnings can develop a lot sooner than the financial system, equivalent to when the financial system emerges from a recession. Nonetheless, over time, earnings progress returns to the long-term relationship.”

Nonetheless, if latest CFNAI index readings are any indication, buyers might wish to mood their expectations heading into this yr. Whereas most financial knowledge collection, like GDP, are backward-looking statistics, the CFNAI index is a forward-looking metric that signifies how the financial system will seemingly look within the coming months. With a continued studying beneath zero, such doesn’t counsel financial “robustness” within the months forward.

Moreover, the CFNAI index additionally helps the continued retracement of precise financial progress charges in direction of 2%, which has been the typical because the flip of the century.

So, what’s the CFNAI index telling us that the BEA financial stories should not?

CFNAI Index: Breaking Down The “Most Essential Quantity”

Understanding the message the index is designed to ship is important. A destructive studying DOES NOT equate to a recession. From the Chicago Fed web site:

“The Chicago Fed Nationwide Exercise Index (CFNAI Index) is a month-to-month index designed to gauge general financial exercise and associated inflationary strain. A zero worth for the index signifies that the nationwide financial system is increasing at its historic development price of progress; destructive values point out below-average progress; and optimistic values point out above-average progress.“

The general index is damaged down into 4 main sub-categories, which cowl:

• Manufacturing & Earnings
• Employment, Unemployment & Hours
• Private Consumption & Housing
• Gross sales, Orders & Inventories

I’ve constructed a four-panel chart higher to grasp the important sub-components and their predictive functionality. For illustrative functions, I evaluate the CFNAI Index sub-components to the 4 most typical financial stories: Industrial Manufacturing, Employment, Housing Begins, and Private Consumption Expenditures. Notably, the CFNAI knowledge is extraordinarily unstable, so I’ve smoothed the info utilizing a six-month common. Then, to align that knowledge with the CFNAI index, I used an annual share change for the 4 mainstream financial elements.

The correlation between the CFNAI index sub-components and the underlying main financial stories is excessive. This is the reason, though this indicator will get little or no consideration, it represents the broader financial system. The CFNAI index doesn’t verify the mainstream view of an “financial resurgence” that may drive earnings progress in 2026.

The EOCI Index Comparability

Moreover, the CFNAI can also be important to our RIA Financial Output Composite Index (EOCI), which is a fair broader composition of information factors, together with Federal Reserve regional exercise indices, the Chicago PMI, ISM, the Nationwide Federation of Unbiased Enterprise Surveys, and the Main Financial Index. The EOCI additionally confirms that whereas financial knowledge has improved following the financial shutdown, the “hopes” of a large resurgence in financial exercise are unlikely. Lastly, provided that these indicators are solely barely into growth territory, any influence from tariffs, deficit reductions, or elevated unemployment will push these indicators again into contraction.

Notably, the EOCI and the Main Financial Index remained in usually recessionary territory for an prolonged interval, but the Nationwide Bureau of Financial Analysis by no means known as a recession. Whereas readings have reverted to regular, the present state of broad financial knowledge helps an financial progress price of two%-ish however not rather more than that. Such a low financial progress price doesn’t assist elevated ranges of employment, elevated wages, or consumption. Such is important to the outlook for earnings.

“Once more, it’s because earnings are a perform of financial exercise. Subsequently, for earnings to match present estimates, expectations for financial progress should enhance sharply. Nonetheless, such appears unlikely given the influence of tariffs and reductions in authorities spending and employment. Subsequently, it’s much more seemingly that we are going to ultimately see a pointy lower in ahead estimates.”

The chance to buyers is that if estimates are too elevated, any discount in these estimates will weigh on asset costs as markets reprice for financial realities.

It’s In The Diffusion

The Chicago Fed additionally offers a breakdown of the change within the underlying 85 elements in a “diffusion” index. Versus simply the index itself, the “diffusion” of the elements offers us a greater understanding of the broader modifications contained in the index itself.

There are two factors of consideration:

1. When the diffusion index dips beneath zero, it coincides with weak financial progress and outright recessions. 
2. The S&P 500 has a historical past of corrections and outright bear markets, corresponding with destructive readings within the diffusion index.

The second level shouldn’t be stunning, because the inventory market displays financial progress. Each the EOCI index above and the CFNAI beneath correlate to the annual price of change within the S&P 500. Nonetheless, what IS stunning is that since 2023, the market has surged increased regardless of a continued slate of financial weak spot in precise exercise. Such is due to the huge infusion of capital into the financial system by fiscal and financial measures. The break of the long-term correlation is exceptional and means that markets are more likely to revert to underlying financial exercise relatively than the other.

That actual correlation additionally exhibits up within the annual progress price of earnings. Provided that earnings are a perform of financial exercise, as mentioned above, the present deviation between earnings progress and the financial system is probably going unsustainable. Provided that the Fed is sustaining a better rate of interest atmosphere, inflation stays sticky, and the present Administration is taking disinflationary actions by immigration and deficit discount insurance policies, it’s unlikely that the financial system will rise to assist present earnings progress charges.

Buyers must also be involved in regards to the present stage of client confidence readings.

Not So Assured

The chart beneath is our client confidence composite index. It combines the College of Michigan and the Convention Board’s sentiment readings into one index. Unsurprisingly, when shoppers are assured, the inventory market tends to rise. As Ben Bernanke famous, rising asset costs enhance client confidence, supporting financial progress. Whereas client confidence has risen from the 2022 lows, confidence readings are beginning to present indicators of stress as shoppers run out of extra financial savings.

Crucially, client confidence feeds CEO confidence.

“Is it the patron cranking out work hours, elevating a household, and making an attempt to make ends meet? Or the CEO of an organization that has the perfect view of the financial panorama. Gross sales, costs, managing stock, coping with collections, paying payments, tells them what they should know in regards to the precise financial system?”

In different phrases, when client confidence is excessive and demand for services or products is elevated, CEOs are keen to expend capital for growth, employment, or elevated wages. When client confidence reverses, CEO confidence may also reverse, resulting in employment reductions, wage cuts, and lowered spending, which impacts financial progress. This is the reason, provided that the market displays confidence, buyers ought to take note of what shoppers and CEOs are saying and doing.

Regardless of the latest uptick in CEO confidence since October, which corresponded with sturdy fairness market efficiency, confidence is hovering close to peak expansionary ranges.

The CFNAI additionally tells the identical story: important client confidence divergences ultimately “catch down” to the underlying index, not vice versa.

Conclusion

If historical past is any information, this chart suggests we are going to start seeing weaker employment numbers and rising layoffs within the months forward.

As famous, the info tells an essential story for buyers. Notably, the historic knowledge of the CFNAI and its relationship to the inventory market have included all Federal Reserve exercise.

The CFNAI and EOCI incorporate the influence of financial coverage on the financial system in each lagging and main indicators. This is the reason buyers ought to hedge danger to a point in portfolios, as the info nonetheless suggests weaker than anticipated financial progress. The present development of the varied financial knowledge factors on a broad scale doesn’t present indications of “financial resurgence” to assist elevated earnings expectations. As an alternative, the info suggests an elevated danger of disappointment in expectations.

Economically talking, such weak ranges of financial progress don’t assist extra strong employment or increased wages. As an alternative, we must always count on that 2025 might be a yr during which company earnings and income disappoint buyers as financial weak spot reasserts itself.

How We Are Buying and selling It

Wall Road analysts’ overly optimistic assumptions are virtually all the time more likely to overshoot actuality. As mentioned, earnings are inclined to develop very near financial exercise, with overshoots and undershoots attributable to macro-driven occasions like financial and monetary interventions or recessionary outcomes. This time is unlikely to be any completely different.

Given the present market exuberance, historic overvaluation issues, and the reliance on buybacks to maintain costs, buyers ought to take into account hedging methods to guard their portfolios.

1. Don’t overlook mounted revenue to decrease market-related volatility.
2. Don’t be afraid to extend money ranges when unsure the place to speculate.
3. Deal with essentially sturdy corporations with sturdy dividend histories.
4. Monitor company buybacks and financial indicators.

As we head into 2025, buyers ought to count on market volatility to extend. Such is especially true if buybacks decline resulting from financial weak spot or coverage modifications. Likewise, monitoring macroeconomic indicators equivalent to employment knowledge, inflation traits, and GDP progress can present early warning alerts of a market shift.

We proceed to counsel taking small actions inside portfolios. Such actions can assist buyers higher navigate the dangers related to an surprising rise in market volatility.

Or, you’ll be able to shut your eyes and hope for the perfect.

Be at liberty to succeed in out if you wish to navigate these unsure waters with skilled steering. Our crew focuses on serving to shoppers make knowledgeable choices in right now’s unstable markets.

Have an awesome week.

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Bull Bear Report Market Statistics & Screens

SimpleVisor High & Backside Performers By Sector

S&P 500 Weekly Tear Sheet

Relative Efficiency Evaluation

Final week, we famous the collision of choices expiration, overbought markets, and information of a possible new viral outbreak in China despatched markets decrease.

“Notably, bonds are outperforming shares for the yr, with small, mid-cap, and discretionary shares sporting a destructive return. With the flight into security during the last week, curiosity rate-sensitive markets are overbought, and progress markets are oversold.We may see a little bit of counter-rotation early subsequent week, however that may rely upon how the absorbs the chance of one other viral outbreak.”

Whereas the outbreak information was shortly dismissed, shares struggled this week, with bonds, actual property, healthcare, financials, and staples outperforming. These sectors are actually very overbought, and income ought to be harvested. Conversely, expertise is oversold sufficient to seemingly see the rally that began on Friday proceed this week.

Technical Composite

The technical overbought/offered gauge contains a number of value indicators (R.S.I., Williams %R, and so on.), measured utilizing “weekly” closing value knowledge. Readings above “80” are thought of overbought, and beneath “20” are oversold. The market peaks when these readings are 80 or above, suggesting prudent profit-taking and danger administration. The most effective shopping for alternatives exist when these readings are 20 or beneath.

The present studying is 52.47 out of a attainable 100.

Portfolio Positioning “Worry / Greed” Gauge

The “Worry/Greed” gauge is how particular person {and professional} buyers are “positioning” themselves available in the market based mostly on their fairness publicity. From a contrarian place, the upper the allocation to equities, the extra seemingly the market is nearer to a correction than not. The gauge makes use of weekly closing knowledge.

NOTE: The Worry/Greed Index measures danger from 0 to 100. It’s a rarity that it reaches ranges above 90. The present studying is 62.50 out of a attainable 100.

Relative Sector Evaluation

Most Oversold Sector Evaluation

Sector Mannequin Evaluation & Danger Ranges

How To Learn This Desk

• The desk compares the relative efficiency of every sector and market to the S&P 500 index.
• “MA XVER” (Shifting Common Crossover) is decided by the short-term weekly transferring common crossing positively or negatively with the long-term weekly transferring common.
• The chance vary is a perform of the month-end closing value and the “beta” of the sector or market. (Ranges reset on the first of every month)
• The desk exhibits the value deviation above and beneath the weekly transferring averages.

The chance/vary report has reset for the start of the month. Nonetheless, I wish to restate the next from final week:

“One of many early warning indicators the risk-range report offers is the transferring common crossover (final column) of intermediate and long-term measures. A couple of months in the past, solely bonds and worldwide traded on bearish crossovers. Since then, we now have sharply elevated the variety of bearish crossovers in numerous sectors and markets. Such suggests an ongoing deterioration in value motion within the markets, which has but to spill over into the S&P 500 utterly. Whereas this doesn’t imply that buyers ought to instantly turn out to be bearish, it does counsel that dangers are constructing for a extra substantial market correction sooner or later if these sub-markets don’t begin to enhance quickly.”

Weekly SimpleVisor Inventory Screens

We offer three inventory screens every week from SimpleVisor.

This week, we’re looking for the High 20:

• Relative Power Shares
• Momentum Shares
• Basic & Technical Power W/ Dividends

(Click on Photographs To Enlarge)

RSI Display screen

Momentum Display screen

Technically Sturdy With Purchase Ranking

SimpleVisor Portfolio Modifications

We submit all of our portfolio modifications as they happen at SimpleVisor:

Feb twenty sixth

“This morning, we’re doing a tax loss harvest and swapping within the portfolio. We’re promoting all of AMD (AMD), which has been underperforming, and swapping it into Arista Networks (ANET). This swap offers two functions to the portfolio. First, it diversifies the portfolio into {hardware} on the expertise aspect, to which we had no publicity. Secondly, it reduces our publicity to semiconductors forward of the Nvidia (NVDA) earnings report tonight.

If NVDA stories properly, that report ought to profit ANET, which may be very oversold, and AMD. Nonetheless, a poor report would seemingly impair AMD greater than ANET. Whereas we nonetheless like AMD, the swap reduces the portfolio danger general.”

Fairness Mannequin

• Promote 100% of AMD
• Provoke a 1% of the portfolio place in Arista Networks (ANET)

Lance Roberts, C.I.O., RIA Advisors