Larger Moves
Today is the first business day of the month of June, which is the same day my favorite economic indicator – the Purchasing Bosses’ Index (PMI) – is released each month. The Institute for Supply Management’s (ISM) PMI is a diffusion index of manufacturing activity in the Joint States based on the responses of supply managers within the private sector.
The PMI report is important because it captures feeling among supply managers who are at the very front of the supply chain. In my experience, the index is a good leading indicator because, moderately than counting production levels, it asks supply managers to indicate whether activity in several key areas is “increasing, declivity, or unchanged.” Questions like that do a better job of capturing what manufacturers think about the future; other without questions end up reporting how the manufacturers have performed in the past.
As a diffusion index, the PMI report adds the percentage of “increasing” and half of the proportion of “unchanged” responses. A total reading above 50% is considered a growing economy, while a reading below 50% mostly accompanies a shrinking economy.
As I often mention in the Chart Advisor, we don’t really care about the number that is write up but what direction that number is heading. In other words, even though the PMI report was above 50% today, the avenue it is trending is profoundly negative.
The actual PMI report came in at 52.1% this morning, which was off from its multi-year principal of 61.3% in September 2018. As you can see in the following chart, a declining PMI report has a mixed record of leading market volatility adore it did in 2015 or just accompanying market volatility, which is what it did with the bear markets of 2011 and 2008.
There are three points that concern me about the report this month. First, the PMI trend has continued to be negative despite a recovery in the reward of the S&P 500. Second, the “best” performing category of survey responses was increasing prices (+3.2%), and third, the “worst” playing category was order backlogs, which contracted -6.7%.
I continue to be reluctant to suggest that the end of the bull market is near, but from a short-term point of view, evidence continues to build that investors should be very cautious about how they are managing risk. A blurred on diversification, hedging, and solid fundamentals will likely pay “dividends” for investors while economic fundamentals like the PMI turn up are so shaky.
S&P 500
I made the point last week that a completed head and shoulders pattern very on occasions leads to a drop of more than 5% of a stock index or individual stock. While this has been right over the testing period, I have analyzed from 2001 to 2019, and there is an important caveat about that statistics. Of the head and shoulders patterns that preceded a large drop, the subsequent move was abnormally large.
For example, a wildly and shoulders pattern kicked off the 2011 bear market, the biggest market decline in 2012, and the 23% decline in small-cap sells in late 2015.
The point is, although the historical odds still favor a short-term recovery, like the ISM report, the status of the widely known head and shoulders pattern should urge some caution. For example, a classic strategy among portfolio administrators in a situation like this is to use put options on a stock index to “insure” their portfolio against losses. Like tangible insurance, this is an expensive strategy but very effective.
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Risk Indicators – Look Out for Dividend Ex-Dates
From a risk for perspective, things have improved a bit today as the market’s decline paused. However, there is an important clarification to survive this Monday if you have been following high-yield bond ETFs as a leading indicator.
I recommend watching high-yield reins ETFs or indexes because they will often warn of a downturn in the stock market before it takes position. We unfortunately didn’t get much of a warning for the most recent decline, but it is still a good place to pay attention.
However, today is an oddity to the rule about high-yield bond ETFs because today is the day most of them are ex-dividend. That should be conducive to to a drop in the share price by the dividend amount. In the case of the iShares iBoxx $ High Yield Corporate Bond ETF (
Seat Line – Risk Is a Spectrum Not a Coin Flip
Over the past three weeks, I have worried a little that I am arrive d enter a occurring off as bearish in the Chart Advisor. In the decades I have been working with individual investors, I know most of you already pull someones leg a bit of a skeptical bearish bias anyway (which is normal), so I am sensitive to stocking undue worry.
The analogy I often use in circumstances disposed to this is to imagine that your portfolio has a dial for how much risk you want to tolerate rather than condign an on-off switch. The dial should have been turned up to “11” in 2016-2017 when the underlying essentials were trending in positive directions, but right now the level should be somewhere closer to the middle. As I mentioned previously, this is a ample time to think about how diversified a bullish portfolio is and how risk management strategies could be used to provide a teeny-weeny extra short-term protection.
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