Market Update

Things have certainly deteriorated over the past couple of months. Seems like a good time to review where things stand and check some of the indicators I follow.

Let’s begin by looking at momentum and trend of global equities (VT). Both have turned lower as measured by the 1-year rate of change and the 210 DMA.

VT Trend

There is absolutely nothing special about these methodologies. But most intermediate term moving averages and look back periods have turned negative.

US equities have performed better this year, but they too are now trending lower. Year over year momentum is still slightly positive.

VTI Trend

The deterioration has been broad based. As of yesterday, only 26% of stocks on the NYSE are above the 200 DMA.


Also, cumulative new highs minus new lows on the NYSE are trending lower (below 50 DMA). As can be seen from the following chart, this is often associated with periods of market stress.


High yield credit spreads are widening as seen by the 3-month rate of change of JNK relative to IEI.


High yield was hanging in until recently. The collapse in oil prices likely pushed spreads higher.


So trend is down, momentum is down, breadth is poor and credit stress is increasing. Not a great backdrop.

Not surprisingly, many people have decided to exit, perhaps at the request of their friendly brokerage. In October margin debt fell by 6.25% month over month. This is a large drop. As a result, year over year margin debt growth is now negative (see FINRA data). A source of liquidity is leaving the market.

So, where to from here?  Obviously, I have no idea.  Economically, at least in the US, things are not recessionary and it seems unlikely that a recession is imminent.  Unemployment is very low and not yet trending higher, retail sales are still strong, industrial production is strong.  Housing is the weak link, likely as a result of higher interest rates.  This is troubling, but overall the balance of the evidence suggests that the economy in the US is slowing but not close to recessionary.

Assuming this is correct, we are likely experiencing a non-recessionary correction that may morph into something more serious probably as a result of something that is not on anyone’s radar.

I do not get the sense that there is any real fear in the market, as compared previous corrections since 2008.  This is just a personal “feeling” and not data based.  Although a bounce is certainly possible at any point, I think the market is not done correcting.  Caution is warranted.

My weekly allocation according to the VT Model on this site is now 40% VT and 60% IEF.  Exposure to equities has been greatly reduced over the past month.