Are Auto Stocks Prime For A Pullback?

short of expectations, causing a notable selloff in auto stocks Monday. The question fresh on investors' minds Tuesday morning is if Monday's decline marks a longer-term trend or buying opportunity.

End Of Cycle?

D.R. Barton, MoneyMorning.com's chief technical analyst, explained during a recent CNBC interview that auto stocks benefited from a long and upward cycle over the past few years, and it is now possible that auto sales growth reached a peak.

Barton suggested that the subprime auto loan market in the United States continues to "overheat," and delinquency rates are reaching alarming levels. As such, it is becoming more difficult for consumers to benefit from "easy car loans" as it has in the past.

Barton further noted the factors that support auto sales, such as low-interest rates, consumer confidence and elevated stock levels still exist. But the fact remains that the auto industry benefited from a surge in demand from consumers who put off car purchases from 2009 to 2012. This also reinforces a view that now is the time for auto sales to cool down a bit as consumers who just bought a car in recent years aren't in the market for a second one. What's Bad For Car Sales Is Bad For Stocks? A Bloomberg report detailed a unique correlation between American auto sales and moves in U.S. stocks. Specifically, declines of auto sales seen in 2011 and 2012 were followed by a selloff while improving auto sales in 2015 was seen prior to a market rally. Needless to say, the correlation isn't exact science; over the longer term, stocks erased losses following declines in auto sales. But this time, it might be different as Monday's poor auto sales came just days after Friday's lackluster consumer spending report.

Nevertheless, the Bloomberg report also noted that consumer sentiment is sitting at a multi-decade high and optimism among small businesses, including local car dealers, is sitting at levels that have been unseen since the mid-200s.

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