After a sharp decline in October, is it time to stick a fork in this bull market?
The rats have been abandoning the ship of cyclical stocks this year. @modestproposal1 put it best, so I will just quote him:
How about some Industrials
Some of those international markets don’t look too hot either
In the US, we could be seeing:
Beginning of a deeper pullback and quasi-bear market (like 2015)
First leg of a true bear market: recession and credit default cycle
The last one is the one I care about. I would really prefer to watch that one from the sidelines. But as of right now, a number of indicators are not suggesting a turn in the economic cycle.
Unemployment Claims - not rising
Yield Curve - flat but not inverted
Credit Spreads - no signs of stress yet
Leading Economic Indicator - not rolling over yet
While housing-related stocks look terrible, homebuilder sentiment has held up.
5 year rolling corporate borrowing cost in the US:
I think in October a multitude of worries hit the market at a time when it was vulnerable.
Continued Fed tightening and weak performance of cyclical sectors: investors worry about being late in the cycle
Trade war with China
Weak data out of China and weaker global growth
Add to that:
Italy’s fight with the EU over its budget
Fears over ‘hard Brexit’
Mid-term election coming up
And all of that more or less hit the buyout blackout period:
And buyouts continue to be pretty important in 2018:
Abwarten und Tee Trinken?
That’s what they say in Germany. Sit tight and have a tea. It’s true, the sell-off was (is?) ugly and the market could well be leading the economic data to the downside. But we have also seen a “mini cycle” before during this bull market such as the energy-industrial recession in 2015/2016. If the economy cools from hot to mediocre, why wouldn’t the market take a breather. If we roll over into a full recession that’s another story.
I will admit to being spooked by the recent market action, ugly charts in cyclical sectors, and weak global markets. The combination of Fed tightening, cooling global growth, and a continued trade war is concerning. But to me, this seems to early to call. If (when) domestic data deteriorates and the credit market starts showing stress, it will be time to re-evaluate. Of course by then the market could have taken a lot more damage.
Just one last scary chart before we finish off.
”If the market closes October at these levels we will see a MACD sell signal“
(Plot twist: it did and the signal triggered.)