One of JP Morgan’s preferred equity market indicators is their Economic Activity Surprise Index (EASI).  It uses trailing data from the previous 6 weeks to gauge whether analysts are currently too optimistic or too pessimistic.  As you can see in the latter half of 2008 analysts became overly bearish which resulted in the current environment that can only be characterized as “better than expected” run amok.  The pendulum has swung to the other side now as analysts are now beginning to catch-up.  We’ve seen it in recent housing data and in yesterday’s Chicago PMI data.  It’s likely that this morning’s ISM will also reflect the overly optimistic trend.

JP Morgan continues to view the EASI as a bullish indicator, but we are beginning to view it more as a contrarian indicator.  Such indicators are better trend following indicators rather than leading indicators.   Currently, it looks like that trend is beginning to run into some resistance as the economic data begins to come up short of expectations.  As for earnings my preliminary research says we likely have at least one more quarter of “better than expected” earnings before the analyst community gives the “all clear” and begins to get far too optimistic about future expectations.

Source: JP Morgan