Inside Markets — Bear Market Patterns

The NY Fed’s Empire manufacturing survey was stronger than expected, with new orders and prices received surprising to the upside. The University of Michigan consumer sentiment reading for September came in below consensus. Positive takeaways from the Michigan survey included lower inflation expectations with the year-ahead number dropping to +3.1% from +3.5% in August. The year-ahead figures are the lowest since March ’21 and just above the two-year pre-pandemic average. Meanwhile, better-than-expected economic data in China fuels hopes that stimulus measures are taking hold. The government pulled another stimulus lever by injecting liquidity via the MLF after cutting the bank RRR yesterday. Cautious optimism for a recovery in China also puts some upward pressure on commodity prices, fueling inflation concerns in the US and Europe.

European equity indices are in the early stages of forming what looks like technical distribution patterns. These patterns usually develop just before the beginning of a cyclical bear market. Latin American indices have a similar look with the Mexican Bolsa already breaking down after a four-month distribution. The early weakness we see in Europe and LATAM markets is likely due to their closer economic linkage with China. Overnight data out of China was relatively encouraging, but any lasting recovery should begin to show in cross markets like the gold/copper ratio and Aussie dollar. China’s economic problems seem linked to a lack of domestic confidence, likely associated with Beijing’s volatile and unfriendly regulatory policy shocks.

The S&P 500 (SPX) may also be forming a distribution pattern with levels below 4310 confirming the formation of a near-term top. In our view, levels below ~4200 would signal the beginning of a recession-driven bear market. Keep in mind, the US yield curve has now been inverted for 15 months with the average recession-induced bear market starting 18-24 months after curve inversion.

The Russell 2000 (RTY) has been the weakest major US index and very close to breaking support at ~1845. Sustained closing levels below 1845 would further validate our tactically bearish view.