Economic Worries Are Making Themselves Known Across The U.S. Markets

True to form, October continues to prove extremely volatile for the equity market. Despite the continuation of strong earnings trends, most of the broad indexes have posted their biggest monthly losses in more than six months, with the S&P 500 down more than 5.5 percent since the start of the month.

As a result of the selling pressure, inflow and outflow on broad-based leveraged ETFs like the Direxion Daily S&P 500 Bull 3X Shares SPXL and Direxion Daily S&P 500 Bear 3X Shares SPXS have spiked, though likely not how you think. While SPXS had some increased interest going into the month, the fund actually posted the largest single-day outflow in mid-October and SPXL had its largest inflow since February, according to fund flow data on ETF.com.

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So, is it really time to start shorting the market, or is this yet another instance of ‘buy the dip?’ On one hand, fund flow seems to suggest traders remain more bullish than bearish. On the other hand, the last time SPXL had this much in-bound cash was just prior to February’s 10 percent correction

Well, there’s no way of knowing for sure whether the decade bull market is done for good, but there are some telling indications that it might be losing steam, however, they’re not coming from the large-cap names of the S&P 500.

The three-month comparison chart on Direxion’s SPXS alongside the Direxion Daily Small Cap Bear 3X Shares TZA and Direxion Daily Mid Cap Bear 3X Shares MIDZ reveals the disparity in volatility between weight classes.

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While this alone might not be shocking, it keys in on larger economic trends that have been developing over the course of the past year. As has been frequently reported, rising interest rates and an outsized corporate debt (to the tune of $9.4 trillion) are causing their fair share of anxiety on the street. Further, small- and mid-cap indexes like the Russell 2000 and the S&P MidCap 400 spent much of the year outperforming their larger counterparts, which themselves have been accused of being overvalued.

However, of more immediate concern to small and medium-sized companies are rising material and component costs as a result of multiple ongoing tariffs and trade wars. If the price of domestic steel is putting the screws to Ford Motor Company F, it’s hard not to imagine the damage it could wreck on smaller manufacturers.

While these price concerns have been offset slightly by a strong dollar, rising rates and the possibility of a slowing global economy as the result of trade disputes and natural cyclic trends could put the kibosh on that. What’s more, should the dollar fall, material and commodity prices could well jump to new highs, putting more pressure on companies lower on the economic food chain.

Company CEOs are not ignorant of these converging forces and the threats they pose to growth. In the October accounting of it monthly survey of sentiment, business publication Chief Executive found that company executives across the board are the least optimistic about the state of the economy than they’ve been all of 2018. Importantly, this trend was most pronounced among small- and medium-sized businesses, which posted 2.4 and 2.7 percent decreases month-over-month.

Whether the market has hit bottom in this recent bout of selling remains to be seen. Many influencing factors, such as hard economic numbers and the Fed’s bimonthly decisions, will remain up in the air until they drop. However, trade, debt, and the strength of the dollar, are three major factors in flux in the broad market. Traders should keep an eye on how changes in these elements affect the outlook of companies most exposed to changing economic tides.

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