Technical Analysis: S&P 500 – January recession tracker January 31, 2018 1388


  • None of our recession indicators are flashing red
  • Broad-based equity market should continue to stair-step higher, with the 20 and 60 day moving average acting as the springboard
  • Despite the recent flattening of the yield curve, the 2s10s spread still suggests another 6 – 8 more months of further flattening before the yield curve inverts
  • General equity market should continue to grow for another 6 – 8 more months

The general equity market continues to vault higher with the S&P 500 Index breaking new record higher day after day. It has only been four weeks into 2018 and the S&P 500 index is already up 6%. A major catalyst for the bullish move was the passing of the tax cut bill in December. Some firms such as Wal-Mar, Comcast, Bank of America, JP Morgan Chase & Co, Starbucks and Disney already have plans to increase wages, issue one-off bonus and hire more workers in response to the tax overhaul.

Figure 1: Phillip Recession Tracker – all remains well


Our Phillip recession tracker is based on 15 fundamental and technical indicators. The threshold represents the levels where bearish signal arises.
Red/Green represents deterioration/improvement from the prior month. Otherwise, it is unchanged.
All clear for now
All clear for now part 2

Likewise, the Phillip Recession Tracker is still showing further improvement, validating the bullish move in the equity market. Most of the recession indicators are still a far cry away from their respective threshold that will trigger the bearish signal, and our base case scenario for seeing some form of significant weakness is at least 6 – 8 months away.  For more information on how we decipher the recession tracker indicators, refer to the report “all clear for now.”

Consumer Sentiment

The general sentiment is still at a high with the Bloomberg Consumer Comfort reaching a new multi-week high at 53.8, last seen in March 2001. CB Consumer Confidence also echoed the feel-good effect as it improved in both November and December 2017 to 122.1.

The only outlier in the consumer sentiment space is the Umich Consumer sentiment where it fell consecutively in both November and December from 100.7 to 96.9. Nonetheless, it is still at the euphoric high level. It is currently near the threshold of 94.0 and it is the only recession indicator that is near the threshold. Watch the development of the Umich Consumer sentiment to see if this fall is just a blip or the start of something worrying. As long as the other two consumer sentiment gauge is improving, the overall mood and performance of the equity market should continue to perform fine.

Figure 2: Umich Consumer Sentiment – sitting at the critical threshold


On the industrial side, the ISM manufacturing PMI continues to expand at a strong pace with the recent reading at 59.7, hovering above the euphoric high. All seems fine from the sentiment perspective.

Retail Sales

Retail Sales YoY growth fell marginally in December as it declined from a high of 6.0 to 5.4. Nonetheless, the general growth trend remains strong on the upside.

The key threshold to watch for the retail sales space is the 1.6% level. A reading below the 1.6% level will signal a great deal of weakness.

Interest rate related data

Nothing alarming here from the interest rate complex as the Ted Spread remained tame. Ted spread pretty much ranged sideways for the past month between 0.33% and 0.25%, signalling calmness. Panic will surface once the Ted Spread begins spiking violently above the 0.60% threshold. Until then, the general equity market should progress higher.

On the other hand, the 2s10s spread (yield curve) flattened to a new 52-week low of 0.48% in January 2018 causing some scare to the market. Nonetheless, our base case projection suggests at least another 6 to 8 more months of further flattening in the 2s10s spread before the spread falls below the danger zone of 0%, signalling inversion of the yield curve. Put differently; the general equity market should still have 6 – 8 more months of upside left in them before it experiences any form of significant pullback.

Looking at where we are currently, the 2s10s spread has also recovered back above the 0.50% psychological level, currently at 0.58%.

 Taking a deeper look at the 2s10s spread shows the possible timeline for the next recession. There seemed to be a strong negative correlation between the 2s10s spread and the Fed Funds Rate (FFR) where the prolonged rate hike cycle leads to the flattening of the 2s10s spread and ultimately the inversion of the yield curve.

For instance, the rate hike cycle in the housing boom period of the 2000s. The FED began the rate hike cycle only in July 2004 where the FFR was lifted from 1% to 1.25%. At the same time, the 2s10s spread was still trading at a high of 1.92%. Subsequent rate hikes to 4.25% in the following 17 months finally dragged the 2s10s spread into negative territory in December 2005. The FED only realised the problem with the negative 2s10s spread six months later in June 2006 where they were forced to halt the rate hike cycle at a high of 5.25%. The halting of the rate hike cycle also signalled to the market that something was amiss. Ultimately, the market fell sharply in the latter part of 2007 as recession ensued in December 2007. Both the inversion of the 2s10s spread and the subsequent halting of the rate hike cycle provided ample warning of a major market downturn. Historically, this pattern has played out perfectly since the 1970s where:

  1. The prolonged period of interest rate hike cycle would lead to the inversion of the yield curve
  2. The inversion of the yield curve would then lead to the halting of the rate hike cycle
  3. The halting of the rate hike cycle and the start of the rate reduction cycle would then lead to a major market correction and recession

Figure 3: 2s10s spread – requires at least another 33 weeks before the inversion of the yield curve happens


Hence, with the expectations of at least three more rate hikes in 2018, we can conclude that the 2s10s spread would continue to follow the flattening trajectory. Referencing the data back in 2005 where the 2s10s spread was also trading at the current 0.55%, extrapolating the pace of the decline suggests 35 weeks before the 2s10s spread drops below the danger zone of 0%. Alternatively, using the recent flattening data in late 2016 and early 2017 suggests a similar timeframe for the inversion of the 2s10s spread. Back in December 2016, the 2s10s spread was trading at 1.33%. It took the market 30 weeks for the 2s10s spread to flatten 0.50% shown by the yellow highlighted box.

Bear in mind even if the 2s10s spread falls into negative territory, the fall out in the market will not be immediate. On average, the recession occurs with a lag time of 54 weeks after the inversion of the yield curve. Thus, based on the recent flattening of the 2s10s spread, the base case scenario points to at least 6-8 more months of flattening before the 2s10s spread falls into the danger zone. In other words, the general equity market still has 6-8 more months of upside left before seeing some sharper corrections.

10 year-treasury yield

With much expectations baked into having another 0.25% interest rate hike in March, the 10-year treasury yield staged a strong move higher. Based on the Futures and Options market, the implied probability of a rate hike in March 2018 is currently at 91% making a 0.25% rate hike in March almost a certainty. Hence, justifying for the move higher in the 10-year treasury yield. The 10-year treasury is currently at three years high of 2.71%. Keep in mind the threshold for the 10-year treasury yield to signal weakness is the 2.00% mark.

Fed Funds Rate

The Federal Reserve (FED) appears to stay on track to their rate hike cycle. According to the FED’s Dot-Plot projection, three more rate hikes of 0.25% is expected in 2018. The market is currently pricing in a 0.25% rate hike in March 2018 as suggested by the Futures and Options market. As long as the FED continues with the rate hike trajectory, that will signal further vote of confidence to the market. The general equity market should continue to rise along with it.

The most important thing to look for is if the FED suddenly switches to a dovish stance and halts the rate hike cycle. That will be the first red flag. Ultimately, the next rate cut would most probably drive the market down along with it.

Employment data

Both the unemployment rate and initial jobless claims remained at their multi-decade lows justifying the strong growth. The unemployment rate is at 4.1%, which is the lowest since 2001 while initial jobless claims index is at the lowest since 1973 at 222,000 new weekly claims. Our preferred measure of initial jobless claims on the year-on-year (YoY) perspective has also improved to -8.7%, way away from the threshold of 4.5%. Overall, unemployment numbers continue to suggest healthy jobs dynamic.

Figure 4: Weekly Unemployment Claims – lowest in 44 years


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About the author

Profile photo of Jeremy Ng

Jeremy Ng
Research Analyst
Phillip Securities Research Pte Ltd

Jeremy specialises in Technical Analysis and has 10 years of experience in studying price action. His areas of expertise include intermarket analysis on the equities, currencies, commodities and bonds market.

He is also a regular columnist on The Business Times - every Monday ChartPoint column.

He graduated with a Bachelor of Science in Banking and Finance from University of London.

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