This week's analysis of the market seems to come down to one chart.
It's a one-minute chart of the SPDR Dow Jones Industrial Average ETF (NYSE: DIA). This chart shows the minute-by-minute record of Friday's market action.
As you'll see clearly below, there's only one factor that caused the big selloff on Friday morning – a tweet from President Trump asking whether Federal Reserve Chairman or China Chairman Xi Jinping is the bigger enemy.
In short, this marks a significant point in the market.
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By themselves, Trump tweets can't determine the direction of the trend in the stock market. Yet, it's entirely possible we will look back in a few months and consider this to be the start of a bear market. The problem is that bear markets tend to occur because a piece of bad news comes while the market is showing signs of weakness.
The daily chart can help explain what I mean.
DIA was at new all-time highs about a month ago. There was a normal pullback from the new highs and then an attempt to rally. Trump's tweet came as DIA neared $264. Prices have moved to that level four times now and failed to break through.
Failing to reach a new high is the first step of a bear market. The next chart is the SPDR S&P 500 ETF (NYSE: SPY) in 2000, where we saw a similar pattern unfolded.
As I told my Income Trader readers recently, the problem isn't one specific event. It's a breakdown in confidence as the economy weakens.
One example of the change in confidence is seen in a recent news story from ChiefExecutive.net:
CEO confidence in future business conditions fell 6% in August from July, according to Chief Executive's most recent polling. At 6.2 out of 10 on our 1-10 scale, confidence is at its lowest level since October 2016, the last time CEOs reported their outlook as 'weak.'
The last time CEO confidence was weak was the month before Trump's election. Many investors have forgotten what the stock market was like back then. The chart below shows that stocks moved with a narrow range from January 2015 to July 2016. In Early November, prices were retesting that range.
Confidence was low, and investor pessimism was high. This was the time when economists agreed that we had reached a "New Normal" where economic growth and stock market returns would be lower than they were in the last half of the 20th century.
It's possible we could be drifting toward that type of atmosphere where pessimism replaces optimism. There are some reasons to believe we should be less optimistic.
Reasons To Be Concerned
The next chart shows profit margins of the companies in the S&P 500. This metric reached record highs in the past four quarters.
Source: Standard & Poor's
For corporations, it really can't get much better than this. And, with the economy slowing, it could be getting a little worse. The next chart is an example of the slowdown in economic data.
This is a chart of the Industrial Production Index, and it's dipping just like it did in 2015 when the stock market stopped going up. I believe this economic indicator is one of the most important to follow because the index is calculated by the Fed. It includes information Fed officials believe is important.
Now, I know I'm using too many charts this week, but I want to include just two more. Next is a chart of Purchasing Managers' Indices (PMIs) from the world's leading economies. Numbers below 50 are consistent with recessions. Germany, the United Kingdom, Italy, and Japan are all below 50.
Purchasing managers are the front line of the economy. They are responsible for ensuring factories operate at maximum efficiency. If they order too little inventory, the factories will not maximize profits. Too much inventory results in the same problem.
When purchasing managers see a slowdown, it is important to consider the possibility of a recession. With production already slowing and purchasing managers worried about the next few months, the likelihood of a recession is high.
One Glimmer Of Hope
Finally, many of you know I like to end my analysis on a positive note. At first, I thought the only good news I have this week is that school is starting and, if we are all honest with each other, parents are happy when the kids go back to school.
But there's more good news. Volatility ended the week at a level where rallies started since the end of December. My last chart shows SPY with my Income Trader Volatility (ITV) indicator at the bottom of the chart.
The blue line marks the current level. ITV shows a short-term rally is likely. That's good news. If prices break resistance, we could see a move toward new all-time highs. That depends, to some degree, on whether or not the president can stay off Twitter. We should know more next week.
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