The New Economy Index (NEI) is on the brink of sending its first confirmed “sell” signal in four years.
The index is a blend of the leading U.S. retail and business service stocks. NEI is based on the concept that these component stocks are accurate reflections of changes within the real-time U.S. economy (as opposed to the lagging economic statistics favored by the Labor Bureau). Except for a brief period in the spring of 2010, NEI has confirmed a firming economic picture for U.S. retailers since 2009. As you can see in the following graph, though, the index has made a series of lower highs and lows – the first in well over two years. Moreover, the important 12-week moving average (red line) has crossed below the 20-week MA (black line) and both moving averages are in the process of decisively turning down.
The weakness reflected in the NEI suggests that U.S. retailers are experiencing what could be the early throes of spillover weakness from the uncertainty and economic weakness in China and the emerging markets. Economists this year have persistently played down the slowing economy in China, but there’s no ignoring the fact that China’s stock market is now in its fifth year of a bear market. That’s a negative sign for China’s economic outlook and there’s no glossing over it. Equity markets always reflect future business conditions in the interim to longer-term outlook. What the Shanghai Composite Index suggests is that China is in for some increasing economic head winds.
Back to the U.S. economic front, if the NEI continues to weaken we’ll likely have a confirmed “sell” signal later this month. That in turn would serve as a warning for investors and business owners to beware a retail sales slowdown in the coming months.