S&P 500 Shows Signs of a Business Cycle Ending, Says Portfolio Manager

Journalist:
Kiril Nikolaev @kirilnikk123
October 2, 2019

The S&P 500 (SPX) has been in a strong uptrend since March 2009.

To date, the large-cap index has been in a bull market for 127 weeks. According to CNN, the S&P 500 is in the midst of the longest bull run in history.

Consequently, many market participants feel euphoric. They think that the party won’t end.

A technical analyst still bullish on the SPX. | Source: Twitter

However, one portfolio manager thinks that the cool kids have already left the building. For some time now, he’s been trying to tell people that the music is about to stop.

Portfolio Manager: ‘Deteriorating Economic Indicators Are Near an Inflection Point’

Octavio Costa is a portfolio manager at Crescat Capital. For months now, he’s been telling his followers on Twitter that the S&P 500 is likely headed to a severe bear market. He looked at the writings on the wall and he saw signs of a market that’s starting to fall apart.

In an exclusive interview with CCN, the portfolio manager said he was deeply concerned about the percentage of inversions in the U.S. yield curve. He said,

The percentage of inversions in the US yield curve surged to over 70% last month. This level of imbalance in credit markets has always led to recessions and severe bear markets in the past.

The spike in the percentage of yield curve inversions may be a prelude to a stock market bust. | Source: Twitter

In addition to the percentage of yield curve inversions, the Buybacks Index of the S&P 500 is in a decline. According to Mr. Costa, these buybacks have been a huge source of liquidity for stocks but now they are beginning to fail. He stressed,

The S&P 500 Buybacks Index is now down on a year-over-year basis, while companies continue to repurchase their shares at record amounts.

Buybacks are no longer boosting the market as expected. | Source: Twitter

Another factor that concerns the portfolio manager is the recent rate cut by the Federal Reserve. He said,

To add to the problem, the Fed is now cutting interest rates late in the business cycle. The last two times this occurred was in January of 2001 and September of 2007 – both occurred near market tops.

To support his stance, Mr. Octavio retweeted a chart posted by hedge fund manager Kevin Smith.

The recent rate cut may be a sign that the SPX has topped out.| Source: Twitter

Stocks are Showing Signs of Weakness

On top of flailing economic indicators, some stocks are starting to falter. Mr. Octavio pointed to FANG stocks which are the leaders of the market. He emphasized,

When searching for cracks in the market, look no further than its leaders. FANG stocks are the first ones to come to mind. Aside from Google, Netflix is down 36% from its previous highs, Facebook close to -19%, and Amazon about -15%. These are all staggering declines when compared to Nasdaq still [trading] near record levels.

Amazon has taken out its long-term uptrend line. | Source: Twitter

Lastly, the portfolio manager explained how microcaps have diverged from the performance of the S&P 500. In a tweet, he wrote that the microcaps through the Russell Microcap Index may be leading the plunge.

The growing divergence between the S&P 500 and Russell Microcap Index is another troublesome development. | Source: Twitter

To explain the relevance of this divergence, Mr. Costa said,

These smaller companies are now down close to 22% since September of 2018. They are very domestic businesses that tend to follow the S&P 500 very closely throughout history.

In a nutshell, the portfolio manager believes that stocks are historically overvalued as fundamentals and economic indicators deteriorate. He warned that a recession may be around the corner.

This article was edited by Sam Bourgi.

Last modified (UTC): October 3, 2019 11:19

Tags: S&P 500
Kiril Nikolaev @kirilnikk123

Kiril is a CFA Charterholder and financial professional with 5+ years of experience in financial writing, analysis and product ownership. He has a bachelor's degree with a specialty in finance and lives in Canada. Kiril’s current focus is on cryptocurrencies and funds, as he does his own crypto research and is a Product Manager at Mitre Media. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. He owns Bitcoin, Ethereum, and other cryptocurrencies. He holds investment positions in the coins but does not engage in short-term or day-trading. Follow the author on Twitter @kirilnikk kirilnikk123@gmail.com