Stocks came under increasing selling pressure this week as deteriorating market breadth and leadership reconfirmed the warnings in our InvesTech Special Report Compounding Critical Warning Flags, published on Monday. This technical update breaks down where the biggest risks are emerging and reveals the key signals to watch in the weeks ahead.
MACROECONOMIC UPDATE
- While the Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) only declined slightly from 49.1% to 48.7%, write-in responses painted a far gloomier picture as businesses continue to grapple with major economic uncertainties.
- The ISM Services PMI rose from 50.0% to 52.4% as the service sector remains in expansion (>50%). However, the Prices Index increased to 70.0%, indicating that inflationary pressures continue to be a rising concern.
- The biggest news this week came in Consumer Sentiment from the University of Michigan which dropped from 53.6 to 50.3. More importantly, the Current Conditions Index dropped from 58.6 to 52.3 – its lowest level on record [see special Market Insight].
TECHNICAL UPDATE
- The InvesTech Artificial Intelligence Index is currently more than -10% off last week’s closing level, as investor speculation and exuberance surrounding the AI trade starts to fizzle. If this indicator continues to fall, it could be a crucial longer-term warning flag that investor psychology has reversed.
- Our Housing [Bubble] Bellwether Barometer fell back below its warning level this week as cracks in the housing market foundation continue to widen. Increasing weakness in this indicator will be a warning of trouble in the broader economy and stock market.
- MOST IMPORTANTLY: Based on the current internal deterioration in downside leadership, our Negative Leadership Composite could trigger bearish Distribution before the end of next week. This would be yet another crucial warning as outlined in Monday’s Special Report.
InvesTech Model Fund Portfolio
Following a new 5% SPDN defensive addition on Monday, the Model Fund Portfolio has an invested equity allocation of 60% with this SPDN inverse fund reducing our “net” stock market exposure to 50%. Current holdings include 55% long funds, 5% inverse bear fund, 5% in an intermediate Treasury ETF, and 35% cash held in short-term Treasurys or a money market fund. [For details on this inverse (bear) fund position see Monday’s Special Hotline]
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