September 22, 2023
US consumer strength has been a major reason to doubt near-term recession risk all year, but some cracks are beginning to show. US services PMI reached a YTD high of 54.9 in May and has steadily slipped closer to contraction territory with today’s flash September reading coming in at 50.2. We also note technical breakdowns in many retailing stocks, especially those exposed to lower income consumers. Obvious concerns include higher crude prices, sticky inflation, student debt repayment, a fading back-to-school tailwind and depleted excess savings. Most recessions start with consumer credit issues. Major US banks have framed the recent increase in credit card delinquencies as ‘post-pandemic normalization,’ but credit default swaps widened significantly this week and need to be closely followed.
We recently called attention to a technical breakdown in the Russell 2000 (RTY) index following a months-long bearish distribution pattern. The RTY is a small-cap index and a good proxy for cyclical stocks given that its members tend to be capital and labor intensive. Other major cyclical proxies with similar distribution patterns include the Philadelphia Semiconductor Index (SOX) and EuroStoxx 50 (SX5E). The SOX closed below technical support levels yesterday and the SX5E is barely holding onto support near 4175. Even the S&P 500 Energy index (S5ENRS) has started to look heavy despite the continued bid under crude prices. The S5ENRS sits at ~686 with a close below 672 likely leading to more aggressive selling of cyclically sensitive stocks.
The S&P 500 (SPX) is also sitting near support at ~4335, and a sustained break below that level would likely lead to increased equity volatility as measured by the VIX index. The VIX closed at 17.54 yesterday, up from last week’s low of 12.82. VIX levels north of 22 would lead to accelerated downside pressure.
The Nasdaq 100 (NDX) has outperformed major US indices YTD but has also formed a bearish distribution pattern. Support for the NDX sits at ~14,500, which is roughly 1.7% below current levels. Last week we noted signs of excessive crowding in mega-cap Tech. Crowding in the largest market cap stocks is a defensive dynamic that ultimately needs to unwind. Mega-cap stocks or the so-called Magnificent 7 were among the weakest in yesterday’s sell-off.