WHO KNEW? IF PHILLY FED INDEX FALLS FAR ENOUGH, IT’S ACTUALLY GOOD FOR STOCKS

Cumberland Advisors’ David Kotok points out that stock-market-wise, bad news can actually be good news:

Jason Goepfert, President of SentimenTrader.com has [a] somewhat obscure but important indicator. . . Jason examined the Philadelphia Fed Index, an index that, in part, triggered the recent serious stock market selloff. This weakness of the Philly Fed Index was used by many to support their forecasts of coming recession. Jason said, “Well, maybe when things are ‘so bad,’ they actually get ‘good.’” He examined the Philly Fed readings since 1968. Ninety-five percent of the time when they were below -30, that is to say, a negative indicator worse than thirty, the S&P 500 Index showed a positive return one year later. That was true on nineteen of twenty occasions. The median return was approximately 23%. The only exception was during the collapse of the tech stock bubble in January 2001.

Kotok adds later that with interest rates at rock bottom, the equity risk premium is 600-plus basis points, which, if history holds, marks “one of the great buying opportunities” for stocks.