3 Charts Point to More Bearish Downside Ahead

The economy is slowly weakening and investors are losing faith in the stock market.

3 Charts Point to More Bearish Downside Ahead

The previously robust employment base of the economy is finally showing signs of cracks. More investors are now becoming bearish about the stock market. It is difficult to see this through the S&P 500's (SPY) lens. When you look at these three charts, it is MUCH clearer. Continue reading to learn more.

We will publish the weekly commentary one day earlier, as the market is closed on Good Friday. Do not mistake this lack of trading days for a lack of important topics to discuss.

It's because I noticed something interesting in my previous article, Recession Alert: Have We Arrived Yet?

This week began with shockingly poor results for ISM Manufacturing, including a very low reading on employment. The pain train continued to roll downhill. This explains clearly the Risk Off activities of the week.

You can find out more about that and our trading plan by reading on. Continue reading to learn more.

Over the past year, we have been seeing weak economic data intermittently. Remember that the GDP for Q1 and Q2 last year was actually negative.

It was not technically a recession because no jobs were lost. This measure of pain along with the economic contraction is what defines a recession.

Some investors have been able to ignore weak economic indicators and still buy stocks because of these past events. At this point, the key to the recession watch is finally seeing cracks in employment. As I mentioned earlier this week, these numbers are beginning to add up. Here is the main section:

Let's now follow the interesting thread regarding the low reading of the ISM Manufacturing Employment Component which is currently at the lowest level post Covid, 46.9. The Fed and many others have wondered what will it take to bring down the unemployment rate, as this is the likely key factor in bringing down the high inflation.

This weak reading may be a good place to start wondering if the employment market is ready to finally rollover. The next day, we receive another hint that the trend is finally underway. The monthly JOLTs data shows a precipitous drop of 632,000 job openings, the lowest since May 2021.

Consider this:

The first step before you lay people off is stopping the hiring of new employees. This reduction in job openings could be the lynchpin to Step 2, which is a much larger cutback of employees that will lead to an increase in unemployment.

Remember the vicious economic cycle that occurs when job losses are part of the mix.

Job loss > Lower income > Lower spending > Lower corporate profits > Rinse and Repeat

The "Rinse & Repeat' aspect acknowledges that the most common solution to lower profits for corporations is to layoff more employees. "This is how the crack in unemployment can grow over time into a larger chasm."

Three more reports have come out since then indicating a deterioration in the employment situation. This includes Wednesday's ADP Employment Change, which came in at 145K jobs gains instead of 200K expected. It was also lower than the 261K reading last month.

The Employment component was also hit hard by the ISM Services report. It dropped from 55.1 to 51.2, echoing the weakness in the ISM Manufacturing Report. Employment was largely based on the services sector, which declined dramatically.

On Thursday, we learned that "Layoffs Have Increased Nearly Fivefold This Year". These announcements can be like a snowball rolling downhill, getting bigger and larger until it forms an avalanche.

Many investors are lowering their hopes for the Friday Government Employment Situation Report. According to the current evidence, the 250K job forecast seems excessive.

Investors will also be paying attention to the wage increases month-over-month. The Fed is most concerned with this form of inflation.

This week's modest drop in the S&P 500 index (SPY), however, does not make the risk off nature of these news headlines so apparent. This is more evident when you look at the divergence in the chart between large and smaller stocks.

Let's look back at the last month to see what we can find:

If you look at just the S&P 500, it is amazing to see that the market has been up for the last month. As you can now see, this is only happening with the largest stocks. Let's now look at the performance of each sector over the last month.

The Risk Off Facts in Price Action are very bearish, as they show a concerted "Flight to Safety", both in the largest stocks and in the most conservative sectors.

Combine that with the warning signs of the economy. Most notably, what seems to be the beginnings of problems within the employment market. Add it all together and you can see that now is a good time to consider being bearish on your portfolio.

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Steve Reitmeister...but I'm Reity to everyone else (pronounced "Righty").

SPY shares dropped $0.19 (-0.05%) during Thursday's after-hours trade. SPY shares have gained 7.41% year-to-date compared to a % increase in the benchmark S&P 500 Index during the same time period.

Steve Reitmeister

Steve is known as "Reity" to StockNews' audience. He is not only the CEO, but also shares 40 years of experience with the Reitmeister Portfolio. Reity's biography is available, as are links to some of his recent articles and stock selections.