The S&P has been very resilient this year in the face of slowing growth, falling earnings and trade war uncertainty. However, underneath the surface, market rotations have been very bearish. Over the past year, high-yield credit has underperformed investment grade (top-left chart), small caps have underperformed large caps (top-right chart), copper has underperformed gold (bottom-left chart) and equities have underperformed bonds (last chart).

These intermarket relationships are approaching contrarian bearish levels that have historically marked interim equity-market bottoms. The main instances when intermarket relationships deteriorated further from the very bearish levels we are currently seeing are when recessions have occurred. Therefore, the extreme moves in these intermarket relationships suggest a binary outcome. Either a) despite our recession signal being “off” we are in fact heading into an imminent recession; or b) the market is set for a risk-on move as bearish market positioning is unwound.

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Source: Bloomberg, Macrobond, Variant Perception