Going Down?
I have been teaching a lot of classes lately. One question that seems to come up over and over again is, "What do I think about our chances of going into a recession?" In my classes, on the radio, and even on CNBC, I was predicting an economic turndown in late 1st quarter 2008 and recession in 2nd quarter 2008. I may be a quarter or two off but the signs are there. You have to remember that the markets move in cycles. We have the bond market which usually peaks before the stock market and the economy. Looking at the chart below, we can see the peak in bond yields occurring in mid 2006. There is usually a lead on average of 27 months from the bond peak and the start of a recession. That would place a target of September 2008 for the recession to hit.
The stock market, measured by the S & P 500 also leads the economic cycle. This lead time averages nine months. Since we made a record high peak in October 2007, that would signal a recession near July 2008. Both the bond market and stock markets are pointing to a recession in the third quarter 2008. The stock market follows a sector rotation model that can be used to identify opportunities in the markets as well as letting us know where we are in the economic cycle. As seen below in the figure from John Murphy's Stockcharts website, sectors in the stock market outperform the broad market in different economic cycles. Since we speculate in the market on what the companies and the economy will do, it naturally leads the economic cycle.
If we are headed toward economic turndown and a recession, we should currently see sectors that mark the peak of the stock market outperforming the others. This would include Materials, Energy, and Consumer Staples. Looking at the figure below, that is exactly what we see. You should expect to see a rotation into consumer staples, healthcare and utilities in the next few months if the economy continues to decline.
There is another asset class that usually signals the beginning of the recession as well. Commodities usually peak two to three months prior to the recession as well. Looking to the chart of the CRB we see that the commodities are forming a head and shoulders formation possibly marking the end of their bull run. If this breaks to the downside, it would also signal a recession starting in July to August.
We have some big news coming out today; the 1st quarter GDP and the Fed announcement can and will move the market. The problem is, will it move enough to break resistance? Looking at the figure below we see that we are bumping up against several resistance levels on the weekly chart. First is the down trendline that began from our highs in October last year. Secondly we are up against the 40 and 80 week EMA's which act as a powerful resistance level in a bear market. Finally there is the 50% retracement level of the previous downthrust. All together this isn't looking too promising for the longs.
A recession like this should last about 9 to 18 months. Buckle up and hang on. Be sure to keep tight stops on long positions, and work on your shorting. I will be teaching one of my favorite courses, Broad Market Analysis in Los Angeles this Friday and then heading off to Toronto and New York starting the 10th. I hope to see you soon in one of my classes. Until next time may all your trades be green and your losses small.
|
As a former stockbroker, brokerage trader, and hedge fund trader, Brandon brings various market views and insight to his classes. A wealth of knowledge, he has held NASD securities series 7 and 63 licenses. An Online Trading Academy graduate himself in 1998, Brandon has been trading his own account since. Brandon taught for Online Trading Academy in 1999 to 2001 before becoming a Realtor and Mortgage broker holding licenses in 15 states. Returning to the Online Trading Academy family late 2005, he now balances trading, teaching and a real estate career.