Around the World, This Indicator Peaked Last Week
Around the World, This Indicator Peaked Last Week by
Globalization brings benefits. Free trade makes more products available to consumers and reduces costs.
However, globalization also increases business cycle correlations. If the United States enters a recession, for example, production of low-cost goods in other countries declines. Now, those countries suffer recessions at the same time as the U.S. Most will also recover at the same time.
Stock market trends reflect business cycles. A growing economy should produce a strong stock market, while economic contractions bring bear markets. Increased globalization led to an increased correlation in stock market movements. Now, there’s nowhere to hide in a bear market.
That makes a recent sell signal in major U.S. and global stock market indexes even more alarming.
At the end of last week, the seasonal trend turned bearish in almost all major market averages around the world.
The chart above shows the seasonal trend of the SPDR S&P 500 ETF (NYSE: SPY). The vertical line on the chart shows where we are now. The trend’s annual peak occurred last week, on July 21.
Seasonal trends are found with mathematical techniques like the Fourier Transform. These same tools have many applications beyond the stock market, like reducing background noise in cellphone calls. So, the math is well-understood and useful.
Seasonal trends are common in financial markets. As one example, a seasonal trend almost completely explains why so many stock market crashes happened in September and October.
Farmers harvest crops in the fall. In the late 1800s, they sold the harvest for cash at local granaries. Crops flowed to markets where grains were processed, usually by rail. Cash changed hands at each stop.