Equity markets have given up some of their recent gains. Below, we highlight the critical variables to gauge whether a correction will devolve into a sustained sell-off.
Investor confidence can be measured through margin debt. While extremely elevated, there is no concrete sign that access to funds is being undermined by the modest backup in interest rates. When the cost of borrowing becomes too onerous, it will manifest in reduced margin debt and forced selling.
M&A activity is losing momentum. A peak in merger activity typically coincides with a rising cost of capital. If corporate sector capital availability becomes a pressing issue, then M&A activity will decline further, signaling that the corporate sector is facing growth headwinds.
Economic signals are mostly positive. Durable goods orders have tentatively perked back up, reinforcing that profits and confidence have improved after a soft patch.
Temporary employment continues to rise. When temp workers shrink, it is often an early warning sign that companies are entering retrenchment mode. If temporary employment falls at the same time as share prices, that would be a red flag.
The relative performance of consumer discretionary to consumer staples can provide a read on purchasing power or the marginal propensity to spend. This share price ratio does not suggest that any consumption concerns exist. If consumer staples begin to outperform, then it would warn of a more daunting economic outlook.
In all, these indicators suggest that any pullback will be corrective rather than a trend change.