Recession Fears

The ISM number coming in at 47.8, below 50 for the 2nd straight month, was enough to fan the flames of recession fears and cause a 40 point drop in SPX yesterday.  The bond  market has a PhD in providing a leading forecast of future economic numbers.  The big drop in yields in August was a clear warning sign that the economic data for the next few months were going to come in weak.  That has happened as the August jobs number and ISM index were well below consensus, along with a bunch of other global PMIs.  That has continued with yesterday's weak ISM number.   Below are historical ISM charts.  We are back to late 2012 and late 2015 levels.

Another factor is the October effect.  The fear of October itself is enough to make investors sell at the slightest bit of bad news.  Especially after last October's brutal selloff, they aren't taking any chances and are playing it safe, selling first, and waiting it out.  It doesn't help that the US China trade talks are happening next week, and most are expecting a disappoint result.  

I am getting flashbacks to late August, when the trade war headlines were so negative, and it felt like a slam dunk to short any rallies, towards SPX 2930.  Once again, we have the negative trade war headlines, and now weak economic data on top of that.  It feels like another obvious time to short.  The trading gut tells me that now at SPX 2925, it is actually more dangerous to be short here than be long.  It doesn't make me want to be long, especially with the stock buyback blackout period lasting for the next few weeks, but it makes me cautious to play the short side.  

Not many are thinking about bullish catalysts, but here a few that I am thinking of:

1.  A truce and a can kick on further China tariffs after next week's US/China trade talks.  Trump seems more desperate to save the stock market, even lying back in late August about having talks with China to boost stocks after they took a dive on more tariffs.

2.  A more dovish Fed that starts QE4 lite to fix the repo market, and probably another 25 bps cut at the October 30th meeting, could ignite sidelined cash into stocks, especially with buyback blackout period ending at that time.  

3.  Germany announcing a fiscal stimulus package as it is becoming quite obvious with the latest Germany PMI that Germany is in a recession.  

Right now, I don't want to go long until I see extreme fear, and we aren't even close, and I don't think it will happen this October.