Time to Hit the Panic Button?

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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:

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Housing

Autos

How about some Industrials

Some of those international markets don’t look too hot either

In the US, we could be seeing:

  • Run-off-the-mill pullback/correction

  • 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

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While housing-related stocks look terrible, homebuilder sentiment has held up.

That said: global growth momentum has turned down and borrowing costs in the US are now rising. I like these two charts by Bodhi Tree Asset Management:

Global Growth:

I think in October a multitude of worries hit the market at a time when it was vulnerable.

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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.)


As always, feel free to email me or contact me on Twitter.
What indicators do you look at? What sources and people do you trust to read the macro tea leaves?

neckarcapital@gmail.com

@neckarvalue


This is not investment advice! Do your own research and consult with your advisors.