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Three Charts that Should Make You Worry

Graham Summers

Posted July 20, 2021

Graham Summers

Yesterday I noted that Friday’s action was very troubling. By quick way of review:

  1. It has been unusual for stocks to close lower on Fridays.
  2. It’s been even more unusual for stocks to finish the week down.
  3. Not only did stocks finish the day and week down but they did so near the lows. This too is highly irregular as the markets typically bounce hard off the lows even if they finish the session or week down.

Today I’d like to delve into the specifics of what the market is telling us.

The market is telling us that something BAD is brewing in the economy. While it’s true that, in general, stocks no longer have a close relationship with the economy (I’ve written about this previously showing how stocks will often rally on both bad and good economic news), certain sectors are HIGHLY correlated to economic activity. And they all are flashing major warnings.

First and foremost is the industrial sector (XLI). These are companies that either produce actual things like tractors, cranes, HVAC systems, etc. or that are involved in real economic activity (mail/shipping). As such, they represent a good gauge of how strong the real economy is: During economic expansions these businesses receive more orders.

The chart is downright awful. Industrials have rolled over and broken below their 50-day moving average (DMA).

Chart: XLI

Next up is the materials sector (XLB). These companies produce things like concrete, copper, steel and the like. During economic expansions these companies receive more orders as they are the primary suppliers of commodities needed for construction and manufacturing.

Here again the chart is awful. The breakdown is more severe than that of the industrials. Not only is XLB further below its 50-DMA, but the down days are powerful, wiping out weeks’ worth of gains in a single session.

Chart: XLB

Finally, we have the consumer discretionary sector (XLY). Consumer spending accounts for 75% of the U.S. economy. The chart is not as bearish as that of industrial or materials sectors, but it is still not good.

XLY has effectively gone nowhere since April. The rally from June into early July failed miserably, and now it looks as though we’ll see a test of its 50-DMA. By itself this is an ugly chart, but in the context of what’s happening in industrials and materials it is very worrisome.

Chart: XLY

Add these charts up and they are telling us something BAD is happening in the economy right now.

How bad?

We’ll dive into that conversation in tomorrow’s letter.

Best Regards,

Graham Summers
Editor, Money & Crisis

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