The signs are all lining up…
…and it might be time to join the ranks of defensive traders right now.
Let’s look at why:
As of 8/21/24, the S&P 500 (SPY) closed at $560.62 and is pushing up against previous technical resistance levels.
A previous high of $565.16 was hit on July 16th, along with the gap down window area (July 16th – July 17th) of around $560 – $562.
S&P 500 (SPY) – Daily Chart
During the last month, money has been flowing into the traditionally more defensive areas of the market:
- Healthcare
- Consumer Staples
- Real Estate/REITS
- Utilities
We can also see the “Smart Money” increasingly allocating their portfolios to more defensive postures and moving away from traditional “risk on” type assets.
You can see this in a recent Bank of America Global Fund Manager survey from this month:
In this survey, Global Fund managers also note their top risk concerns, with a possible recession being the biggest “Tail Risk” – increasing from 18% in July to 39% in August:
The minutes from a recent Federal Open Market Committee meeting also show a growing concern about “labor market risks and vulnerabilities” with the unemployment rise at the time of the meeting.
Digging deeper into both the increasing concerns around a possible recession along with the Fed’s labor market/unemployment worries, we can look at the Sahm Rule Recession Indicator which incorporates both to determine recession probabilities.
This indicator signals the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to the minimum of the three-month averages from the previous 12 months.
For July 2024, this indicator has just risen slightly above the 0.50 threshold to 0.53 and has been steadily increasing prior to that over time.
Not a good sign!
(Note the shaded column areas on the graph above indicate recessions.)
We can dig further into the specific indicator readings by the month prior to and during these recessions to get a better understanding when the indicator triggered at 0.50 or above and indicator/unemployment readings afterwards:
Going back to 1953, we can see (with the exception of the shorter Covid Recession where readings still remained significantly elevated) when this indicator triggered at 0.50 and above, employment numbers continued to deteriorate at least 4+ months after triggering.
To sum all of this up:
- The S & P 500 (SPY) is near former resistance levels.
- August sector rotations are moving into more defensive areas of the market.
- Global Fund Managers are allocating assets in August to a more defensive posture.
- There are increasing “smart money” concerns/risks of a possible US recession.
- The Fed is worried about “labor market vulnerabilities”.
- The “Sahm Rule Recession Indicator” is triggering just above 0.50.
- AND the Fed Chair Jerome Powell is speaking Friday, 8/23, at the Jackson Hole, Wyoming Conference.
Should we be increasingly more cautious and defensive as well?
We think the answer is probably YES!
That means keeping a close eye on the overall markets.
And the best way to do that is with TST Trender.
This tool is dialed into the major markets, including the SPY and the QQQ, so you can be ahead of shifts and find trade ideas to take advantage of whatever direction these markets are moving.
It’s my favorite tool to hang onto as we lurch forward into potential recession.
Happy Trading!
