Reply Hazy, But Not Really

Let’s just throw something out there: a recession is on the horizon.

That’s not particularly ground-breaking. And it’s not particularly useful. But it is particularly newsworthy.

The fact of the matter is, all expansions eventually end in recession. So, unless the expansion continues, a recession is on the horizon.

The question is not if there will be a recession, it’s when. And, judging from the growing data, the probability of a recession is on the rise.

This becomes more evident when you look at the BF Economic Macro trend. While still relatively sanguine, the curve has been on a slow decline. And therein lies the problem: there is no specific magic data point that says the party’s over. Instead, there’s a slow build of evidence that things are deteriorating, but the evidence is not conclusive yet.

By now you’ve probably read and hear much of the data about late-expansion markets. It’s not uncommon for a spike higher before equity markets ultimately go into bear market territory.

Of course, past performance is no guarantee of future results, so this is not to say the same thing will occur again. But the conditions that drove this market here are the same conditions that persist to this day: a highly accomodative Fed, historically low interest rates, unattractive conditions for most foreign markets, and a need for yields. In short, it’s everything that forces investors into equity markets: There is no alternative (TINA).

The recent flight to the safety of the 10-year treasury is perhaps the wonder of this market. And it may also be the biggest ‘tell’ for the economy. Investors apparently do not see inflation as a risk in this economy. And the data seems to support this.

In spite of record low mortgage rates, the housing market seems to have plateaued. Unemployment remains ultra-low, but wage inflation remains relatively benign. And we’re starting to see some fade in manufacturing data. The consumer, for all appearances, is relatively stagnant. We’re simply re-inventing the economy to happen via computer screen instead of retail store. But in the process, the consumer can price-compare. (It’s as if the natural forces of capitalism are at work online)

So is the market going to correct or not?

Who knows? The truth is, it’s all educated guess. So rather than try to call the next drop, let’s take a look at key indicators that may give us more insight.

Perhaps the simple and obvious first-level indicator is the 200-day moving average. For the SPX, this index is hovering close to the 2800 market (which also happens to be a big fat round number). This seems to be an area of great concern for most market technicians, as it is both a key support metric, as well as an area that markets the bottom of a trend channel. If the SPX were to breach this level, it could be viewed as a more traditional downside breakout.

The problem with breakouts is they can become self-fulfilling prophecies. Enough people want to see a correction, the markets will manufacture one. So far, this recent pull-back has been another buy-the-dip opportunity.

The key question is, has anything changed? For the most part, the answer appears to be no. Things are still positive, but momentum is slowing. And, of course, there’s an election about a year out on the horizon. That always provides lots of fodder for analysts to chew on.

For the time being, despite the chaos that is the news cycle — and all the uncertainty it may breed — there appears to be little material change to the base case for this market. So, given the fundamental story is still more or less intact, the story is that the markets are still in a secular long-term trend that hasn’t failed yet.

What we’ll watch:

  • Fed behavior — a change in policy would be material to this market
  • The 200-day moving average — if the SPX falls below this market for consecutive weekly closes, this could be a more significant signal
  • September… in general… because this tends to be a lousy month in the markets
  • The BigFoot Macro Indicators — which remain positive at this time
  • The BigFoot Database — which has declined from about 73% long down to 63% long over the last couple of weeks
  • The BigFoot Algo’s on the major indexes — with both the SPX and DJIA both shifting from buy to hold — the NASDAQ remains with a buy signal for now.

Until one of these signals has a material shift, the 2019 SPX target of 3084 remains intact.

Note: for subscribers, the semi-monthly forum call has been moved from this Thursday to the following week on August 29th.


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