One stock-market cycle indicator flashes most bearish reading since Oct. 2022

By Jamie Chisholm

Such sell-off periods typically last a month, says HSBC

The equity market sell-off has further to go and there will be few places to hide.

That's according to ECCLES, HSBC's equity cycle model, which has just flashed its most bearish assessment since October 2022.

In a note published Monday, HSBC's data science team led by multi-asset strategist Duncan Toms, said that the Equity CyCLE Selector , or ECCLES, indicator as of close on Aug. 2 was showing the stock market was in a sell-off phase.

HSBC says its model is just trying to identify what stage of the equity cycle markets are in, rather than trying to predict the future.

The flurry of risk-off moves seen so far in the first global session of the new week made them even more confident of that assessment, they said.

"The last 18 months of Everything Rallies or Late Cycle helped us navigate considerable tumultuous news flow[as shown in the chart below]. For example, helping us remain bullish against widespread worries over banking crises in early 2023," said the HSBC team.

"Yet for the first time since October 2022, ECCLES states that we are in an equity sell-off." Such sell-off periods typically last a month and see a 10% correction, HSBC said,

The current drivers of ECCLES' sell-off prediction are a wide array of equity market factors, including weakness in eurozone large-cap stocks, a higher VIX index VIX, and retreats for Russell 1000 growth stocks RLG, the Nasdaq COMP, S&P 500 SPX and Japanese equities. Note, the chart below doesn't even account for Monday's 12.4% plunge for the Nikkei 225.

"This broad based nature of the Sell-Off drivers suggests that the model is more confident of this Sell-Off lasting," said HSBC.

The good news, said HSBC, is that a sell-off phase doesn't have to last long, sometimes only a few days.

Unfortunately, they add that it seems unlikely to be the case this time, given Monday's market angst. "If the sell-off phase is more prolonged, equity market pain can be more drawn out."

And there will be relatively few places to hide said HSBC. "Developed-market defensives, the FTSE 100 and the S&P 500 generally hold up a little better on average. Yet all three still typically fall on an absolute basis in a sell-off environment," said the bank.

-Jamie Chisholm

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08-05-24 0822ET

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