It’s a funny kind of bear market

The US economy continues to show signs of robust good health.

Total hours worked are rising, signaling healthy real GDP growth.

Real GDP and Total Hours Worked

Growth in average hourly wage rates is rising, reflecting a tighter labor market. Underlying inflationary pressures may be rising but the Fed seems comfortable that this is containable.

Average Hourly Wage Rates

The Leading Index from the Philadelphia Fed maintains a healthy margin above 1.0% (below 1% is normally a signal that the economy is slowing).

Leading Index

But market volatility remains high, with S&P 500 Volatility (21-day) above 2.0%. A trough above 1% on the next multi-week rally would confirm a bear market — as would an index retracement that respects 2600.

S&P 500

The Nasdaq 100 is undergoing a similar retracement with resistance at 6500.

Nasdaq 100

The primary disturbance is the trade confrontation between the US and China. There is plenty of positive spin from both sides but I expect trade negotiations to drag out over several years — if they are successful. If not, even longer.

I keep a close watch on the big five tech stocks as a barometer of how the broader market will be affected. So far the results are mixed.

Apple is most vulnerable, with roughly 25% of projected sales to China. Recent downward revision of their sales outlook warns that Chinese retail sales are falling. AAPL is testing its primary support level at 150.

ASX 200

Facebook and Alphabet are largely unaffected by a Chinese slowdown, but have separate issues with user privacy. Facebook (FB) is in a primary down-trend.

ASX 200

While Alphabet (GOOGL) is testing primary support at 1000.

ASX 200

Amazon (AMZN) is similarly isolated from a Chinese slow-down although there may be a secondary impact on suppliers. Primary support at 1300 is likely to hold.

ASX 200

Microsoft (MSFT) is the strongest performer of the five. Their segment reporting does not provide details of exposure to China but it appears to be a small percentage of total sales.

ASX 200

The outlook for stocks is therefore mixed. Be cautious but try to avoid a bearish mindset, where you only see problems and not the opportunities. Even if China does suffer a serious slowdown we can expect massive stimulus similar to 2008 – 2009, so the impact on developing markets and resources markets may be cushioned.

Best wishes for the New Year.