SPX is the Best Leading Economic Indicator

All of a sudden, it turns to October, and the bad ISM and the ISM Services Indices have turned into huge market movers.  The crowd has been walking on egg shells, worried about recession (fear peaked in mid August), and those recession fears have spiked again with the back to back weak ISM numbers. 

Let's not forget, ISM index is a PMI, which is a survey of purchasing managers, so it is soft data, not real numbers.  The reason so many are freaking out is because they think the ISM is a leading economic indicator, but its more like a lagging stock market sentiment indicator.  Look at what happened to the ISM over the past 5 years: 

When you see the stock market react so strongly to economic data, it is usually during a time of weak market sentiment, or seasonal fears (bearish October, repeat of last fall), or most likely, lack of stock buyback support during this stock buyback blackout period (late Sep to late October).  Those are usually times when the market has already been going down and the bad economic data punctuates the final move lower, usually forming a bottom immediately or within 2 trading days.  (examples: June 4, 2012, October 2, 2015, October 3, 2019?).

I am sticking with my view that a recession will not start because of a trade war or because of weak Europe/China.  The most likely cause of a recession will be a bear market in the US stock market after the Fed has already reached the zero lower bound, unable to lower rates.  The stock market is the only real dynamic part of this low growth era, and it has reached such a huge size of GDP that it is the tail that wags the economic dog. 

So looking at economic data to try to forecast future stock prices is nonsense.   It should be the other way around.  The best leading economic indicators are not things like building permits, yield curves, or PMIs.  It is the SPX.

Yesterday, we made an intraday V bottom off a very oversold condition on the bad ISM services number.  And the bond market went up strongly, which is the risk parity trade working again.  On the in-line nonfarm payrolls number, bonds are not selling off even as stocks are going up.  Again, risk parity positive.  I will not be interested in long term shorts until we get sustained bond weakness when stocks rally.  Still nowhere close to that.