There are clear signs of trouble on the horizon.
10-Year Treasury yields plunged to near record lows this month as investors fled stocks for the safety of bonds.
The Federal deficit is widening — unusual for this late in the cycle as Liz Ann Sonders points out. We are being prepared for the impact of a trade war: pressure the Fed to cut rates and raise the deficit to goose stocks.
Gold surges as Chinese flee the falling Yuan.
Commodity prices fall in anticipation of a global recession.
Are we there yet? Not quite. The Philadelphia Fed Leading Index is still above 1% (June 2019). A fall below 1% normally precedes a US recession.
Volatility (Twiggs 21-day) for the S&P 500 is rising, as it usually does ahead of a market down-turn, but has not yet formed a trough above 1% — normally a red flag ahead of a market top.
And annual payroll growth is still at 1.5%. This is the canary in the coal mine. A fall below 1% (from its 2015 peak) would warn that the US is close to recession.
What to watch out for:
- Falling commodity prices below primary support (DJ-UBS at 75) will warn that the trade war is starting to bite;
- Falling employment growth, below 1%, would signal that the US economy is affected; and
- September is a particularly volatile time of the year, when fund managers clean up their balance sheets for the quarter-end, with a history of heavy market falls in October as cash holdings rise.
I tell my clients to sell into the rallies. Don’t wait for the market to fall. Rather get out too early than too late.
Of course I cannot guarantee that there will be a recession this year, but there are plenty of warning signs that we are in for a big one soon.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
