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Reducing bond exposure by 5% to 95% of benchmark duration. Further reducing exposure to the U.K. bond market and increasing exposure to Japan. Models, monetary policy, volatility, and technicals all drive the changes.

Stocks and bonds tumbled, producing the worst start for a 60/40 portfolio since 1974. Cash and the U.S. dollar were the only asset classes to rise in Q3, with international equities falling more in dollars than in local currency terms. Equity leadership trends mean reverted, with Growth, small-caps, and Consumer Discretionary outperforming.

The top-level model shifted allocation from stocks and bonds into cash. The technical indicators rolled over, but global shipping has risen above its intermediate-term trend. Most top-level indicators support bonds and cash over stocks.

ISM Manufacturing PMI falls to lowest level since the start of the pandemic recovery. Construction spending continues to decline, led by housing.

A closer look at a retest of June lows is concerning. Nearly all major indexes and 45% of S&P 500 members are now below first-half lows. It's not too late for a successful retest but technical damage is building.

Core PCE inflation up, led by services prices. But near-term downward trend remains intact. Consumer sentiment remains depressed. Regional factory activity weakens, pointing to a lower ISM Manufacturing Index next week.

Weekly talking points and key visuals from NDR strategists' insights.

According to the Dallas Fed's Energy Survey released this week, 85% of oil and gas executives expect current underinvestment in exploration to lead to significant tightening of the oil market by the end of 2024. A global recession is the bears' best argument against oil and Energy. However, a tight market combined with the sector's 8.5% shareholder yield and market-cap upside may favor the bulls.

Mortgage rates have surged at a rapid pace this year and are likely to rise more as the Fed tightens. The reduction in affordability has adversely impacted sales, starts, and sentiment. This has brought back memories of the Global Financial Crisis and the bursting of the housing bubble. Fortunately, the environment is different now.

Rising interest rates driven by Fed policy are expected to continue to drive mortgage rates higher. Higher mortgage rates will further reduce housing affordability, thereby further eroding demand from home buyers. As demonstrated in September, real estate can be expected to underperform the S&P 500 if interest rates continue higher.

Initial jobless claims resume their decline, showing the Fed has more work to do to cool down the labor market. Q2 personal income and profits revised down, reducing the discrepancy between GDP and GDI.

We're currently seeing some of the broadest and fastest global central bank tightening in history. Historically, this has presented headwinds to the global economy and equities. Our calculation of the global central bank rate is likely to reach levels associated with severe recession by early next year.

Given the market downtrend, we focus here on relative performance. We found thematic ETFs that have broken below their absolute 50-day MA but are above their relative 50-day MA.

Modest uptick in CFO economic optimism, but projection for growth still reduced. Inflation worries persist. Advance goods trade deficit shrinks, expected to add positively to Q3 real GDP growth. Declines in pending home sales and mortgage applications imply weaker home sales ahead.

Free cash flow/enterprise value has a positive factor composite score and the strongest long-term returns. Select companies based on cash position, earnings estimate controversy, price momentum, earnings revisions, and free cash flow/enterprise value. Favored stocks include: Chevron, Wells Fargo, Bristol-Myers Squibb, ConocoPhillips, Amgen, Advanced Micro Devices, American Express.

1973 analog plus DAVIS265 and S574A argue for another good short-term bottom soon. But the High-Low Logic Index does not yet show the market is fully oversold. And our major models like the Fab Five, bond yields, and the NDR version of the Fed Model all still argue for long-term caution.

Strong labor markets and falling gasoline prices boost consumer confidence. Core durable goods orders jump, a positive sign for factory activity. New home sales rebound strongly. New and existing home price y/y growth moderates. Richmond Fed regional activity steady, following contraction.

Payroll growth typically slows significantly in the 2nd year of Fed tightening. Fast tightening cycles are more detrimental. A rising real fed funds rate implies weaker labor market conditions in 2023, with a stronger impact on interest-sensitive sectors such as manufacturing and construction. The expected increase in the unemployment rate shatters the soft landing scenario, but also paves the way for future equity gains.

Shifting 5% from stocks to cash in response to model deterioration. The retest of the June lows is inconclusive, but persistent selling pressure means the early results are not good. A year-end rally is still possible as part of a countertrend rally from deeply oversold levels.

Sharply rising yields present challenges for European equities. Historical precedence suggests that yields need to start falling before European equities recover. A flattening German yield curve and an expensive cyclically adjusted earning yield relative to the bond yield suggest continued risk for equities.

For those who want to be contrarian, or who just want to know what to watch to turn bullish, we present seven indicators for your consideration. A deteriorating economic outlook and declining inflation expectations are making bonds better values. But central banks are not done tightening, so it may be premature to turn bullish on bonds.

Relative breakouts for Utilities, Staples, LatAm , and shorter term Treasurys /TIPS (XLU, VDC, ILF, SHY, VTIP). Relative breakouts but absolute breakdowns for short term Corps, Munis and HY (VCSH, MUB, HYG). First simultaneous weekly outflow from stocks, bonds, and commodities since February 2020.

CFNAI weakened in August but is not yet indicating a recession. Texas manufacturing activity continued to contract in September.

Shifting 10% from stocks to cash. Now 5% underweight stocks, marketweight bonds, 5% overweight cash. Responding to expected September update of Global Balanced Account Model. Future market performance and relative trends will provide secular indications.

Year-end rallies have been less common and weaker when the S&P 500 has been down through September. Results have been closer in recent decades. Year-end rallies have been consistently stronger during midterm years.

Weekly talking points and key visuals from NDR strategists' insights.

The weight of the evidence still suggests that we're in a moderate global slowdown. But we've recently seen more indicators flash negative signals, including our Global Recession Probability Model and global leading indicators. This indicates that the risk of severe global recession is rising for some time in 2023, which would create more downside risk for global equities.

The S&P Global Flash U.S. Composite PMI rebounded to a three-month high, but still in contraction territory. The drag from services activity eased. Price pressures were mixed by sector, but mostly continued to moderate.

A hawkish Fed and war in Ukraine are key reasons the trade-weighted U.S. dollar index is running up nearly 20% year-over-year. We looked at 52-week correlations of themes to the U.S. dollar index. With high Asia-Pacific exposure, several Tech and "green" themes are among the most negatively correlated to the dollar. Clients can use our ETF Insights report to find dollar sensitivity/exposure.

With the economy likely headed for recession, margins should come under pressure. The factors sustaining high margins are likely to reverse in the coming quarters. Economic margin has fallen below its five-year average, a negative condition for equities.

The percent of oversold U.S. equity ETFs has been following a pattern of lower highs on market pullbacks. Additional weakness may break that pattern. Similar improvements can be seen in ETF measures of sentiment however S&P 500 constituent breadth is degrading. Technical measures of trend offer little evidence of trend reversal.

LEI declines further in August. Combined with other leading indicators and the ETM, it suggests high risk of recession in the near-term. Initial jobless claims up slightly, but the trend suggests labor demand remains strong and labor market conditions are tight. Equipment finance industry confidence falls, a negative for capex growth. Current account deficit narrows in Q2.

The top of the S&P 500 is still concentrated with the biggest five stocks comprising of 23.1% of the weight. What makes the recent rise in concentration unique is that the biggest companies are all technology oriented. FANMAG is in the midst of its worst one-year stretch relative to the S&P 500 on record.

Terminal rate to hit 4.75% in 2023, as controlling inflation remains job #1. Achieving and sustaining 2% inflation will be challenging without inflicting economic hardship, including recession. Failure to achieve the inflation goal risks unmooring inflation expectations and increasing the term premium.

Economic growth narrows across states. Recession odds still low, but risk for the near-term rises. Existing home sales continue to decline. Price pressures ease slightly, partly due to seasonal effects. Mortgage applications pick up in the latest week, but trend remains negative. Architecture billings and freight activity both improve, showing that demand in these sectors is still positive.

Given 1) we exceeded our price target, 2) Managed Care has been weak in Q4 of recent midterm election years, and 3) we expect more of a risk on year-end rally, we are closing out our Overweight Managed Care trade.

The NDR Crowd Sentiment Poll is in the midst of its third-longest stretch of extreme pessimism since 1995. After exiting previous long periods of pessimism, the stock market has been in a cyclical bull. It has paid to wait for pessimism to reach an extreme and then reverse before turning bullish.

Updating our factor recommendations. Choose stocks based on price momentum, trend, operating cash flow efficiency, interest coverage, and free cash flow/enterprise value. Selected stocks include: LVMH, Novartis, Shell, Novo Nordisk, TotalEnergies, Hermes International, Equinor, Christian Dior, BHP Group, BP, GSK, Relx.

Stocks and bonds have moved together with similar sentiment trends - both show high pessimism. U.S. dollar and gold have moved inversely, with excessive dollar optimism and gold pessimism. Interest rate developments should influence sentiment and whether reversals become more evident.

Despite a pickup in housing starts in August, a widespread decline in permits points to weaker construction activity in the near-term.

Emergent trends, signs that economic leading indicators are closer to bottoming, and relative valuations are constructive for European Cyclical sector allocation. However, we still see downside risk for equities and would recommend a Defensive sector bias for risk averse investors. Improvement in the cyclical industry relative strength trend would result in a more bullish outlook for Cyclical sectors.

Although Volcker had "The Courage to Act" to slay the inflation dragon, he had help along the way. Without help, the Fed will need to keep rates higher for longer. The dot plot is likely to show an increase to the 4.00% to 4.25% range by the end of the year, and perhaps another 25 bp in 2023.

HMI falls near lowest level since 2014, implying weaker housing starts ahead.

Two breadth thrust indicators fired on the early September rebound. The S&P 500 immediately gave back the gains on the bad CPI report. Trust the thrust has transformed into trust, but verify.

Modest uptick in consumer sentiment, but y/y momentum still negative for growth. Inflation expectations moderate, led by falling energy prices.

Weekly talking points and key visuals from NDR strategists' insights.

Base-building process evident in lower highs of VIX and higher lows of equity benchmarks, Risk-On/Risk-Off Ratio, and RO/RO diffusion index total. Recent Risk-On Index additions trending higher -- copper/gold ratio and relative strength of ACWI Consumer Discretionary sector and Russell 2000 Growth Index. 70% of markets now have rising 50-day moving averages.

Amazon's relative strength (RS) trend is at a crossroad. Since reaching an oversold level on May 24, AMZN has outperformed the S&P 500 by over 20% and RS is back to its 200-day moving average.

Total credit market debt ticked down as a share of GDP in Q2, but the level is still too high. Debt service will become more burdensome with rising interest rates and slowing income and earnings growth. Debt growing faster than output is inflationary, raising the risk of a hard landing for the economy.

Retail sales rebound, while high inflation forces more spending on necessities. Industrial production declines. Regional manufacturing indexes point to more weakness ahead. CEO economic outlook continues to worsen. But initial jobless claims continue to decline, defying expectations. Lower import prices and unwinding of excess inventories suggest some downward pressure on goods prices.

There appear to be several constructive signs that global consumer price growth is likely to peak soon. But inflation remains elevated as demand is still strong and near-term inflation expectations are high, which will keep central banks hawkish for some time. Some of the secular factors that had kept inflation anchored for decades may have been permanently damaged by COVID and Russia's war in Ukraine.

Crude spiked in the aftermath of Russia's invasion of Ukraine but prices are now below pre-invasion levels. Crosscurrents for Energy include slowing economic growth and record overbought readings on the bearish side, and record free cash flow and extreme pessimism on the bullish side. We have the sector on watch for an upgrade.

Bond market performance has been mixed following yield curve inversions. But on a median basis, Treasurys and credit generally underperformed. The current inversion is pretty typical except for the high inflation, which impacted the real fed funds rate.

The stock market has tended to bottom after the end of Fed tightening cycles. When a bear has ended before the last hike, a second bear market has often occurred during the Fed cycle. The wide time range between the end of the bear and the first cut argues against using a single cut to justify a bull market.

Led by energy, PPI inflation declines. Pipeline pressures recede. Budget deficit near steady, but student loan program adds uncertainty to the near-term path. Mortgage applications remain under downward pressure from rising mortgage rates.

We see higher energy prices and U.S. climate legislation as key drivers of recent green theme outperformance. We look at six outperforming green ETFs including recommended ICLN as well as ETHO, LIT, and URNM which could be on the verge of a relative strength breakout.

Short-term sentiment again got oversold in early September. Yet, longer-term asset allocation, while better, is still overweight (overbought). And longer-term valuation, while better, is still overvalued.

Both headline and core CPI inflation came in hotter than expected in August, despite a decline in gasoline prices. Broad underlying price pressures underscore the difficult task for the Fed and point to continued rate hikes. Small business optimism picks up, but y/y momentum still consistent with declining economic activity. Manpower employment outlook for Q4 cools slightly.

The MBS cap is fantasy. Redemptions are likely to be below $20 billion a month. Market liquidity has been deteriorating all year, leading to increased bond and stock volatility. We present several indicators to watch for problems arising from the balance sheet runoff.

OECD U.S. CLI falls to lowest level since 2009, excluding the pandemic. Consumer inflation expectations drop.

Large Value at relative resistance and longer duration Treasurys break down (IWD, TLH, ZROZ). Equities, commodities, USD, and U.S. cap/style funds with weekly outflows while bonds see inflows (PDBC, UUP).

Small/large and Growth/Value failed to confirm the June lows. Small/large and especially small-cap Growth/Value appear to be establishing uptrends. A year-end rally would benefit greatly if previous laggards like small-caps and Growth participate.

Weekly talking points and key visuals from NDR strategists' insights.

Wholesale I/S ratio picks up, reflecting fewer shortages and supply chain issues. Housing affordability up slightly, but level and trend still spell housing market weakness ahead.

A major driver of Apple's stock price the past two years has been the nearly 5 point improvement on already incredible margins. Strong sales growth in higher-margin services and Pro/Pro Max iPhones has been key. Possibly fearing a weak consumer, Apple isn't raising prices in China or the U.S. for the iPhone 14. Apple stock has a low correlation to the CPI but higher costs and slower sales could bring margins back to earth.

It looks as if inflation has peaked and the price index reading from the ISM is consistent with only modest inflation pressures. Wages and income growth are consistent with lower inflation. The dollar is extremely strong and global supply chain pressures also suggest falling rates of inflation. The leading edge of the economy is slowing and recession always sees lower inflation.

The S&P 500 Cycle Composite shows late September, early October to be a seasonally weak period followed by a potential rally. We identify six funds with seasonal weakness in September but strong seasonality in the fourth quarter. The funds offer a diverse selection including Value, Growth, Thematic, and ESG.

Upgrading Emerging Markets from underweight to marketweight, downgrading Japan to marketweight and Europe ex. U.K. to underweight. Responding to Global Regional Equity Model, raising EM allocation by 5% while cutting allocation to Japan by 3% and Europe ex. U.K. by 2%. More aligned with model and relative strength trends. EM holding its own despite U.S. dollar strength.

Initial jobless claims fall for a fourth consecutive week. Level is off its cycle low, but inconsistent with recession. Used vehicle prices continue to decline, reducing pressure on CPI inflation.

The S&P 500 finished down 4.2%, with nine of 11 sectors declining in August. The combination of rising rates and slower earnings growth has weighed on cyclical Growth sectors. Energy, Utilities, and Consumer Staples were the top performers during the month.

2021's beat rates are proving to be unsustainable. The downward pressure on estimates, margins, and earnings growth should continue into 1H 2023. Valuations are in purgatory.

Smaller trade deficit expected to contribute positively to Q3 real GDP growth. Mortgage applications continue to decline, pointing to further housing market weakness ahead.

On the surface, August was a good month with 39 of 51 (76.5%) themes we track outperforming the S&P 500. But the mood changed mid-August. From August 12 thru September 6 the S&P 500 plunged 8.7% while more than half of the themes we track plunged more than 10%. We credit rising rates for the mood swing. Since August 1 the 10-year Treasury yield has spiked an astounding 73 basis points and rate-sensitive Tech has been hit hard.

The latest global PMI data indicate that the case is building for a more severe recessionary scenario. The deterioration in economic activity has been far more pronounced among developed economies. Global price pressures and supply-chain hurdles continue to be less of a problem.

Upgrading U.S. to marketweight, downgrading Europe marketweight. Upgrading Japan to overweight, downgrading U.K. to underweight. GFIAM and fair value model readings prompt adjustments, along with technicals. BOJ to remain an outlier for at least six more months.

The Daily Trading Sentiment Composite is back in its excessive pessimism mode, in which the S&P 500 has had double-digit returns. The daily composite reading is again consistent with pessimism indicated by the Crowd Sentiment Poll and DSI Global Sentiment Composite. Earnings yields have risen with a wider gap versus bond yields.

The ISM Services PMI picked up in August, while the S&P Global U.S. Services PMI sank deeper into contraction. The average of the two PMIs points to slower but still positive services activity growth. Employment trends show labor demand still robust.

European equities historically perform poorly in September, especially when equities have fallen in the prior eight months. We compare 2022 to other times when equities have fallen year-to-date and find similarities with 1970 and 1974. Given past precedence we would expect weakness through September but going into 2023 the outlook could improve.

TIPS yields are relatively attractive on an absolute basis and modestly undervalued on a relative basis. Inflation expectations are well anchored, but there is a range of outcomes that can be seen in the years ahead. Risk-averse investors should strongly consider adding TIPS to their portfolios.

The Fab Five Tape has reversed some of the improvements made during the summer rally. The recent decline was due to short-term overbought conditions and a lack of confirmation from long-term breadth. A less severe autumn pullback could set the stage for a year-end rally.

Weekly talking points and key visuals from NDR strategists' insights.

Job creation remains strong as more people come back to the labor force, driving up the unemployment rate. This report is not sufficient to deter the Fed from another 75 bp hike later this month should the CPI report come in line with expectations. In other reports, vehicle sales decline as the market remains undersupplied. Factory orders contract.

S&P 500 operating margins have now fallen by more than 40 basis points leaving a 30 basis point rise in the unemployment rate as the last thing on our recession check list. The bottom line is that Fed now has a little breathing room for rate increases, and we could be setting up for a Q4 rally, but we still remain on the path to recession.

Our current view at NDR is that the U.S. has not fallen into recession, according to criteria by the NBER, the official arbiter of recession in the U.S. But we list reasons why many think we already have entered recession. Although a soft landing is still possible, many signs point to recession in 2023.

Both ISM and S&P Global U.S. Manufacturing PMIs show factory activity near weakest since mid-2020. Layoff trends remain subdued, indicating continued tight labor market conditions. Nonfarm productivity for Q2 revised up slightly, but unit labor costs still surging. Construction spending declines, led by residential.

Copper indicates economic expectations, with real growth reflected by copper/gold ratio. During severe economic recessions, copper and market declines have been relatively big. 2022 declines have thus far been more consistent with moderate slowdown. Copper trends tend to be opposite of trends in emerging markets and U.S. Dollar Index.

The global slowdown and the relative monetary, fiscal, and trade balances continue to support the strong dollar, in line with our bullish technical indicators. The strong dollar impact on inflation and emerging market vulnerability varies widely by economy. A reversal in the factors driving the strong dollar, including the global slowdown, Russia's war, and the U.S.'s faster unwinding of policy, could see the dollar weaken.

If persistent supply side issues cause inflation expectations to move meaningfully higher, stagflation could become a problem for risk assets. Historically, stocks have been weak during periods of stagflation and leadership has been more defensive. Consumer Staples and Health Care have been the top performers during stagflation, while Financials has been the worst.

The New World Order has been quietly taking shape for years on the monetary side. But it will take time to evolve. For now, the USD remains king, as common alternatives have performed poorly this year. The USD will not stay strong forever.

Recession fears are the most likely trigger of a retest of the June lows. From a seasonality perspective, a retest could come in the next several weeks. 1962 and 1973 offer clues for whether any retest would be successful.

Chicago Business Barometer and other manufacturing reports suggest softer growth in August. New ADP employment report shows notable slowdown in private sector job growth. Mortgage applications continue to decline, suggesting further weakness in housing market activity ahead.

This publication shows clients how to use the six trend charts from our Trend Tracker report, including our new Six Indicator Composite Report, to stay on top of trends. We highlight improving trends for ICLN, MILN, HERO, and Managed Care and warning trends for MLPX, KWEB, and PHO.

Retail traders have embraced the rally more than institutional managers. The spread between retail and institutional net futures positions is one of the widest since the financial crisis. Regardless of retail or institutional classifications, sentiment extremes have been warnings of trend reversals.

Led by a jump in expectations, consumer confidence rose in August for the first time in four months. July JOLTS data shows labor market remains extremely tight. Existing home price growth eased further in June, but y/y rates still elevated.

European investor sentiment is considerably pessimistic according to investor surveys. But normalized measures of sentiment and market-based indicators suggest that the market was overbought in mid-August and downside risk remains. Technical indicators have yet to support a bullish outlook for European equities.

The Fed takes ownership of inflation but will need some help. Inflation expectations so far remain well anchored. Unless they are successful in bringing inflation down, there are only so many times the Fed can raid its piggy bank. It may take some time before the Fed's job is done.

Both current and future conditions indexes remain in contraction territory in August.

The top-level model shifted allocation from bonds into cash. No indicator changes this month, but externals and internals weakening. The top-level indicators remain split between stocks and bonds.

Dollar uptrend more decisive than stock market trend. Moving average picture improving with dollar composites remaining bullish. Consistent with trend weakness of currencies and gold, which remains inversely correlated with the dollar.

Lower energy prices drive down inflation. But income and spending edge up less than expected. Consumer sentiment picks up, led by a jump in expectations. Near-term inflation outlook eases. Goods trade deficit narrows, boosting the estimate for Q3 GDP growth.

Weekly talking points and key visuals from NDR strategists' insights.

This is the best sustained intermediate-term thematic breadth since early 2021 with zero days below 70% and only three days below 80% this month. However, long-term thematic breadth remains anemic at only 22%. We're encouraged by the breadth of the Risk-On Indices (proxies of global risk tolerance). Correlation of the breadth measures fell throughout 2021 as overbought themes were sold with indifference to the broader market.

The Fab Five Monetary Composite remains in negative territory. The three non-bearish indicators could easily deteriorate. Need monetary conditions to improve to increase confidence in the sustainability of the rally.

India is moving up in the ranks as one of the largest contributors to global growth. Compared to the world's biggest economies, India's near-term outlook is much more favorable. As a large and populated economy, India has drawn similarities to being the future China. While there are some likenesses, India still has a bit to do before it can unleash its full potential.

Out flows from the Financial Sector SPDR (XLF) reversed indicating increasing positive sentiment for the sector fund. Yield curves reversed trend in early August but may not yet have bottomed. Additional steepening would benefit XLF. It is likely too early to get bullish on XLF but price action at key levels may offer early evidence.

Upward revisions to consumer spending and inventories were partly offset by a deeper decline in residential investment. Corporate profits rebounded and are tracking average growth at this stage of the business cycle. Jobless claims fell last week, as labor demand remains strong.

Sector model's technical- and macro-based indicators are giving contrary messages. Technical composites for cyclical sectors have improved, led by a strong bounce from FANMAG sectors. Worsening macro outlook is more supportive of defensive leadership.

Confirmation from RO/RO Ratio would be strong support for continuing uptrend. Consistent uptrends among Risk-On Index components while Risk-Off Index components more mixed. 50-day RO/RO Diffusion Index bullish but 200-day index not confirming.

We preview our Jackson Hole expectations. Talk of rate cuts next year is premature, but understandable. Inflation could remain stickier than the Fed expects, which could lead to more rate hikes down the road.

Profit margins fell as inflation rose. Energy accounted for a higher percentage of profits. Sales turnover slowed while financial leverage rose, especially in consumer sectors.

Weaker than expected durable goods orders suggest slower but still positive factory output growth in the near-term. State conditions remain broadly positive, indicating minimal odds the economy is currently in recession. Architecture billings weaken, pointing to slower nonresidential construction spending growth ahead. Continued declines in pending home sales and mortgage applications suggest more housing market weakness in the coming months.

PAVE has seen a nice broad-based rally the last two months that allowed the ETF to get back to the top-end of its one-year relative strength trading range. However, PAVE will likely need lower rates to break out. Lower rates should not only help the market rally, but also stabilize residential construction, a key to our infrastructure overweight.

Replacing the lower volatility factor with greater earnings estimate dispersion. Select companies based on cash position, earnings estimate controversy, price momentum, earnings revisions, and free cash flow/enterprise value. Favored stocks include: Berkshire Hathaway, Merck, Broadcom, Wells Fargo, Bristol-Myers Squibb, Philip Morris, ConocoPhillips, American Express.

The short-term Daily Trading Sentiment Composite was recently excessively optimistic, while the intermediate-term Crowd Sentiment Poll was extremely pessimistic. This combo is rare, occurring only 2.2% of the time since 1995. The market has struggled under those conditions, implying short-term optimism may need to be relieved before the rally can continue.

Flash Composite PMI in contraction territory for the second consecutive month, led by services. Richmond Fed regional activity also contracts. New home sales fall to lowest level since 2016. Price growth moderates, but still elevated.

ETM has fallen into the mild recession zone, historically a bearish sign for the economy and markets. Contracting housing market activity, depressed business confidence, and other leading indicators also point to a recession in the near-term. But most consumers are still sitting on a large cushion of savings, which means a soft landing is possible or a potential recession could be mild.

The yield curve has flattened dramatically this year. Room for further flattening. Curve flattenings and inversions have been spreading to swaps, TIPS, and munis. Back end steepening and model divergences are preliminary signs of future trend change.

The CFNAI rebounded in July, indicating economic activity picked up at the start of Q3. But its trend and diffusion index suggest below-trend growth and more weakness than strength across the economy.

Despite the first-half selloff, the S&P 500 still looks overextended compared to its long-term trend. Among sectors, Consumer Discretionary, Technology, and Utilities are at overbought extremes. Energy and Consumer Staples are trading most below their long-term trends.

Weekly talking points and key visuals from NDR strategists' insights.

Some mean reversion in bonds was expected after such a big move and we reiterate our upgrades of Clean Energy and Millennial Spending. However, if the 10-year yield breaks above 3% we will be forced to reevaluate our bullish positions.

The cyclical slowdown in housing market activity portends broader economic weakness ahead. Fed tightening and rising consumer credit are expected to push up debt burdens and squeeze spending growth. Rapidly shrinking liquidity is still a downside risk for equities.

Continued declines in the LEI and our Economic Timing Model point to rising risk of recession. Existing home sales slide and prices decline, as housing market continues to cool. Philly Fed factory activity expands modestly, while the 6-month outlook remains deeply negative. Jobless claims little changed, as labor demand is still robust.

We examine the performance of various asset classes, including global and international equities, the dollar, commodities, and fixed income during global slowdowns. Based on historical norms, a moderate global slowdown has already been priced into most asset classes, but not a severe global recession. We maintain our view that we are in a moderate global slowdown, however the risk of severe recession is likely to rise in 2023.

Shifting 5% from bonds to stocks. Now overweight equities, marketweight bonds, and underweight cash. Rally Watch and Global Balanced Account Model show indicator improvement. Risk-On/Risk-Off Ratio confirming. Ratio revised with replacement of commodity-related indicators and bond price.

S&P 500 and sector volatility readings have been trending lower. 100-day volatility peaks have marked major sector leadership turning points, historically. A continuation of the volatility downtrend would be supportive of the risk-on leadership that has developed since the June 16 S&P 500 low.

Sell signals from our Inflation Timing Model and commodity prices are bullish for bonds. Yield curves give a recessionary warning while inflows return to bond funds. New world order taking shape as foreign investors shun Treasurys.

Vehicles and gasoline weigh on retail sales in July, but underlying demand for goods is still solid. Business inventories increase in line with sales, masking excess inventories in some retail categories. CEO confidence plunges further, on expectations of recession in the next 12-18 months. Mortgage applications continue to decline, implying housing market weakness ahead.

We recommend overweighting the Global X Millennials Thematic ETF (MILN) relative to SPY as a shorter-term trade. We target 16% relative upside by mid-November. We see sentiment toward Consumer Discretionary as overly pessimistic given we believe inflation growth has peaked, the U.S. consumer is still the bright spot of the U.S. economy, and dramatic underperformance by the Consumer Discretionary sector since November 2021.

Looking for cheap, oversold stocks with a wide dispersion of earnings estimates. Choose stocks based on mean reversion potential, earnings estimate dispersion, earnings revisions, and cheaper operating cash flow multiples. Selected stocks include: Daimler, Volkswagen, BMW, Engie, Volvo, AP Moller - Maersk, Exor, Norsk Hydro, BHP Group, Rio Tinto, GSK, Anglo American, BT Group.

DAVIS265 shows too much short-term optimism but comes with an offset from a breadth thrust buy signal. S574A is not overbought and more bears than bulls in AAII survey. Moreover, there has been a lot of shorts and buying of inverse ETF funds. Longer-term, high prices relative to the economy and too much household debt with sharply rising rates are a sentiment negative.

Many technical and sentiment indicators are bullish, while macro and fundamental risks remain. Macro often looks terrible at the lows, so dismissing technicals on macro concerns is ignoring market history. We are watching for technical and/or macro improvements to add equity exposure further.

Housing starts fall to lowest level since early 2021, led by single-family. Permits point to continued weakness ahead. But industrial production strengthens, led by vehicles, alleviating recession fears.

Moving average breadth can get stuck at high values during strong market uptrends. Outperformance breadth is more flexible and responsive to market conditions. Outperformance breadth has historically been better able than moving average breadth to estimate post-correction returns and the occurrence of further downside risk.

Upgrading MBS to overweight from marketweight. MBS should outperform in a trading range environment. Banks should have enough balance sheet capacity to resume MBS purchases.

There were zero funds on our Absolute Breakdown report. Dividends and Utilities hit new all-time highs. Mid-cap relative breakout (SDY, REGL, XLU, RYU, IWR, VO). Largest weekly flows to equity funds since Fed's surprise 75 bps hike. Flows return to diversified and agricultural commodity funds (PDBC, DBA).

HMI falls near lowest level since 2014, implying weaker housing starts in the months ahead. Empire manufacturing activity contracts sharply. Cass Freight shipments and expenditures near steady.

Now that short-term breadth thrusts have fired, watch for intermediate-term breadth follow through. The percentage of stocks above their 50-day moving averages is 1% point shy of a bullish signal. We are in the window when the 50-day moving breadth thrust indicator has fired after previous bear market lows.

Consumer sentiment up to a three-month high in August, on lower gasoline prices and a firmer economic outlook. Near-term consumer inflation expectations ease, but still at high levels. Import prices decline in July, led by cheaper fuel and helped by a stronger U.S. dollar.

Weekly talking points and key visuals from NDR strategists' insights.

VIX and 100-day volatility indices receding from apparent peaks, consistent with reversing sentiment. Support for probability that bear market lows in place, within continuing secular bull. Watch for confirming credit spread improvement and declining volatility's influence on emerging market performance and global breadth.

The much-anticipated "Ethereum Merge", a software update to the Ethereum blockchain that will use energy-efficient proof-of-stake mining, looks on track for September and is driving Ether (ETH) higher.

The bullwhip effect saw inventories put GDP into negative territory in Q2. Inventories relative to demand vary widely by sector, distorting the message from headline figures. High inventories relative to demand present downside risks to the economy and equities, but should also lead to lower inflation.

PPI fell in July, led by lower energy prices. Cost pressures eased across the production flow. Jobless claims picked up in the latest week, but labor market conditions are still tight. Housing affordability continued to worsen in Q2.

The Invesco DB U.S. Dollar Index Bull ETF (UUP) has been in a surprisingly strong uptrend with a 12-month trailing Sharpe Ratio close to 2.0. Following the July FOMC meeting and evidence of softening labor demand, UUP had its largest single outflow of funds in its history. Our intermediate term mean reversion indicator for UUP has dropped below 2.0 signaling the fund is oversold.

Upgrading Consumer Discretionary to overweight, downgrading Utilities to marketweight and Materials to underweight. Also reducing Health Care by 1%. The moves are a response to the leadership rotation from Value to Growth sectors and the corresponding shift from our sector model.

Most of our eurozone recession watch indicators have flashed negative signals, indicating high risk of recession in 2H. Services and tight labor markets are the only signs of hope, but Russia's war and ECB tightening present huge downside risks. Despite this high risk of recession in the eurozone, this does not necessarily imply that the region will drag the U.S. down with it.

Several measures of liquidity show deterioration. But RRP usage is near a record high. As QT accelerates next month, it behooves us to pay attention to market liquidity.

Electricity generation is forecast to be one of the more rapid transformations to renewable energy sources. We view the Inflation Reduction Act (IRA) as signal of the U.S.'s focus on energy transformation and serves as a catalyst for investment in the Clean Energy Theme. We are recommending a long position in the iShares Global Clean Energy ETF (ICLN) for exposure to the theme on its breakout from a seven-month range.

With energy prices falling in July, headline inflation peaked. But rents and services price inflation still hot. Tight labor markets and unfavorable base effects will likely keep core inflation high in Q3, suggesting another large Fed rate hike in September. Wholesale inventories increase. Mortgage applications mixed.

We are shifting our tactical recommendation to small-caps from large-caps. The change is mostly based on technicals but is supported by valuations, interest rates, and the dollar. Biggest risks are recession and broad market conditions; this could be a shorter-than-average trade.

Margin debt growth is close to oversold levels. Public and secondary offerings of stocks are at levels usually seen around market lows. But the short-term NDR Daily Trading Sentiment Composite is showing excessive optimism.

Loss of productivity and spiking ULC suggest Fed pivot talk is premature. OECD U.S. CLI continues to slide, pointing to further weakening in economic growth ahead. NFIB small business optimism ticks up, but level still close to lowest since 2013.

Strong second quarter earnings announcements have provided a boost to European equities. Falling prices and lower price-to-earnings ratios suggest that market expectations are in-line with fundamental and economic predictors of earnings. Long-term valuation measures have improved but still look moderately expensive.

Upgrading Europe to overweight from marketweight. Downgrading U.K. to marketweight from overweight. Closing out European peripheral debt underweight. Revised model will result in lower allocation volatility. Chinese bonds hanging on relative to U.S.

ETI declines in July, pointing to slower payrolls and real output growth ahead. Consumer inflation expectations come down substantially.

Numerous parallels between 1973-74 and today. Declining bond yields supported a strong summer rally. Ultimately, inflation proved to be too much, the economy went into recession, and the stock market resumed its decline.

Broad-based payroll gains, higher wages supporting the consumer sector. Unemployment rate comes within a whisker of rounding down to 3.4%. Fed pivot premature. Rate cuts not on the horizon.