Market commentators are sifting through the data, looking for reasons to explain the sharp sell-off in stocks over the last two months. But everything they examine is likely to be shaded by their bear-tinted spectacles after the S&P 500 broke primary support at 2550.
![S&P 500](https://i0.wp.com/www.incrediblecharts.com/images/2018/2018-12-20-spx.png?w=1140&ssl=1)
The Nasdaq 100 also broke primary support, confirming the bear market.
![Nasdaq 100](https://i0.wp.com/www.incrediblecharts.com/images/2018/2018-12-20-ndx.png?w=1140&ssl=1)
Of the big five tech stocks, Apple and Google are both testing primary support, threatening to follow Facebook into a primary down-trend. If the two break primary support, that would further strengthen the bear signal.
![Big Five tech stocks](https://i0.wp.com/www.incrediblecharts.com/images/2018/2018-12-20-faaam.png?w=1140&ssl=1)
Volatility (21-day) is now close to 2% but the key is how volatility behaves on the next multi-week rally. If volatility forms a trough above 1% that would confirm the elevated risk.
![S&P 500](https://i0.wp.com/www.incrediblecharts.com/images/2018/2018-12-20-spxq.png?w=1140&ssl=1)
Divergence? What Divergence?
Why do I say there is a significant divergence? Look at the fundamentals.
Fedex has just released stats for its most recent quarter, ended November 30. Package volumes are rising, not falling.
![Fedex Stats](https://i0.wp.com/www.incrediblecharts.com/images/2018/2018-12-20-fdxstats.png?w=1140&ssl=1)
Supported by a very bullish Freight Transportation Index.
![Freight Transportation Index](https://i0.wp.com/www.incrediblecharts.com/images/2018/2018-12-20-freight.png?w=1140&ssl=1)
Consumption is strong, with Services and Non-durable goods rebounding. No sign of a recession here.
![Consumption](https://i0.wp.com/www.incrediblecharts.com/images/2018/2018-12-20-consumption.png?w=1140&ssl=1)
Light vehicle sales are at a robust annual rate of 17.5 million.
![Light Vehicle Sales](https://i0.wp.com/www.incrediblecharts.com/images/2018/2018-12-20-vehicles.png?w=1140&ssl=1)
Retail sales growth (ex motor vehicles and parts) weakened in the last month but is still in an up-trend.
![Retail](https://i0.wp.com/www.incrediblecharts.com/images/2018/2018-12-20-retail.png?w=1140&ssl=1)
Housing starts and authorizations are still climbing.
![Housing](https://i0.wp.com/www.incrediblecharts.com/images/2018/2018-12-20-housing.png?w=1140&ssl=1)
Real construction spending (adjusted by CPI) is strong.
![Construction](https://i0.wp.com/www.incrediblecharts.com/images/2018/2018-12-20-constrn.png?w=1140&ssl=1)
Manufacturers new orders (ex defense and aircraft) have rebounded after a weak 2015 – 2016.
![Manufacturers New Orders](https://i0.wp.com/www.incrediblecharts.com/images/2018/2018-12-20-neworders.png?w=1140&ssl=1)
Corporate investment is growing at a faster rate than the economy, with rising new capital formation over GDP.
![New Capital Formation](https://i0.wp.com/www.incrediblecharts.com/images/2018/2018-12-20-capital.png?w=1140&ssl=1)
The Fed is shrinking its balance sheet which is expected to impact on liquidity. But commercial banks are running down excess reserves on deposit at the Fed at a faster rate, so that Fed assets net of excess reserves (green line) is actually rising. Hardly a drain on liquidity.
![Fed Balance Sheet](https://i0.wp.com/www.incrediblecharts.com/images/2018/2018-12-20-fed.png?w=1140&ssl=1)
Market pundits are watching the yield curve with bated breath, waiting for the 10-year to cross below the 2-year yield.
![Yield Differential 10-Year minus 2-Year](https://i0.wp.com/www.incrediblecharts.com/images/2018/2018-12-20-yield2.png?w=1140&ssl=1)
In the past this has served as a reliable early warning, normally 12 to 24 months ahead of a recession. But the St Louis Fed Financial Stress Index is well below zero, signaling an accommodative financial environment.
![Financial Stress Index](https://i0.wp.com/www.incrediblecharts.com/images/2018/2018-12-20-stress.png?w=1140&ssl=1)
Why the mismatch? Fed actions — QE, Operation Twist, and even steps to shrink its balance sheet — have all suppressed long-term interest rates. We need to be wary of taking signals from a distorted yield curve.
Why have stocks reacted?
This is not a Pollyanna outlook. Never argue with the tape — we are clearly in a bear market. So why are stocks diverging from the economy?
The answer is China.
The impact of a trade war with the US would most likely cause a recession in China. Oil prices are already plunging in anticipation of falling demand.
![Nymex Light Crude and Brent Crude](https://i0.wp.com/www.incrediblecharts.com/images/2018/2018-12-20-crude.png?w=1140&ssl=1)
Commodities are likely to follow.
![DJ UBS Commodities Index](https://i0.wp.com/www.incrediblecharts.com/images/2018/2018-12-20-dubs.png?w=1140&ssl=1)
The impact of a Chinese recession would be felt around the globe. Europe has its own problems and could easily follow.
![DJ Europe Financial Index](https://i0.wp.com/www.incrediblecharts.com/images/2018/2018-12-20-e1fin.png?w=1140&ssl=1)
The US is likely to emerge relatively unscathed but Wall Street is going to be exceedingly cautious until some semblance of normality is restored.
I do not suggest selling all your stocks but make sure that there is enough cash in the portfolio to take advantage of opportunities when they arise.