Auto Sector is a Leading Indicator of Market Tops
This is a custom index using Toyota+Honda+Ford's long term charts plotted against the S&P 500 (both using moving averages to smooth data).
It's pretty simple, when the auto sector is diverging from major equity indexes in a negative fashion, that = bad stuff ahead. The auto sector has shown that it peaks before the s&p 500 does, which makes sense due to fundamental factors. Auto's require lots of capital to build, and a lot of raw materials that are subject to inflation. This means late-cycle inflation often hurts the auto sector before it starts to trickle down elsewhere. Additionally, autos are also subject to credit markets, where higher rates = more difficulty financing cars. This causes purchases to drop due to people having less money to throw around and credit being more expensive.
It's pretty simple, when the auto sector is diverging from major equity indexes in a negative fashion, that = bad stuff ahead. The auto sector has shown that it peaks before the s&p 500 does, which makes sense due to fundamental factors. Auto's require lots of capital to build, and a lot of raw materials that are subject to inflation. This means late-cycle inflation often hurts the auto sector before it starts to trickle down elsewhere. Additionally, autos are also subject to credit markets, where higher rates = more difficulty financing cars. This causes purchases to drop due to people having less money to throw around and credit being more expensive.
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