My “Fear-of-Recession” indicator tracks the spread (on a moving-average, percentage basis) between the S&P 500 and the Morgan Stanley Cyclical Index. The theory is that since the cyclical stocks tend to be more recession sensitive, they will fall before a recession starts, thus giving a warning of an impending downturn in the S&P 500. I have looked at this theory from a number of angles, but I haven’t been able to come up with accurate buy/sell points. So far I have developed only a rough indicator shown on the following chart. The Black line is the S&P 500; the Blue is the Morgan Stanley Cyclical index. The spread between the indices (expressed as the inverse of a moving-average of percentage change) is shown solid Red. The indicator falls when the spread increases since it is an inverse of the spread. (That just makes it easier to visualize.)
A downturn in the spread
has preceded corrections in 2010 and 2011 by about 6-weeks to 2-months.
The indicator is now
falling steeply and thus it is “leaning toward recession”; the current downtrend
started 8-trading days ago on 6 December.
My “Fear of Recession” indicator would move to an all-out sell mode if
the Morgan Stanley Cyclical Index falls at a steeper rate.
Because of its limitations noted above, the Fear-of-Recession indicator is not yet included in the Navigate the Stock Market system that generated a sell signal on 7 November.
HUSSMAN ON RECESSION
John Hussman, PhD, still
thinks we are in recession. Here’s a comment
from a trader board I visit (my friend Cliff will appreciate this comment): “so
what ? this guy has been calling the
same doom and gloom since SP 1000, 3-yrs ago....here we are 42% higher... one
day, he'll be right, in the meantime he got hammered....” BORING STATISTICS
After 3-weeks without a statistically significant move, as measured in price-volume, the S&P 500 has had 3-statistically significant days in the last 5-trading days. (A statistically significant day exceeds the average plus 1-std deviation over the last 10 or 20-days {one-sigma}.) There is an underlying trend in the data that suggests weakening. Looking at only the statistically significant days that were up, the trend in the size of the up-days has been declining. That is not a tradable trend though – it could persist as the market continues up for some time. It’s a trend worth watching.
MORE ON THE FED
“EXPERIMENT” (FROM HUSSMAN’S POINT OF VIEW)
“Federal deficits
presently support about 10% of economic activity... last week, Ben Bernanke
announced that the current “Twist” program (where the Fed buys long-term
Treasuries and sells an equal amount of shorter-dated Treasuries) will be
replaced with outright “unsterilized” bond purchases. In doing so, Ben Bernanke
has put the economy on course to choke down 27
cents of monetary base for every dollar of nominal GDP by the end
of next year – in an economy where even the slightest normalization to interest
rates of just 2% would require the monetary base to be cut to just 9 cents per
dollar of GDP to avoid inflationary outcomes.
...To normalize the Fed’s
balance sheet without contraction and get from 27 cents back to 9 cents of base
money per dollar of GDP without rapid inflation, we would require over 22 years of
suppressed interest rates below 2%, assuming GDP growth at a 5% nominal rate.
Indeed, Japan is on course for precisely that outcome, having tied its fate 13 years ago to Bernanke’s experimental prescription.” - John
Hussman, PhD, Weekley Market Commentary for 17 December 2012, Hussman Funds
at...
http://www.hussmanfunds.com/
IS THE US THE NEXT JAPAN?
Japan has the highest Debt
to GDP ratio in the developed world. The
United States is number 2. Today the
NIKKEI is only 25% of its value in 1990 – or stated another way – the Japanese
stock market has lost 75% of its value in the last 20-years. A similar outcome for the US would put
S&P 500 at about 400 in year 2032.
Kind of plays havoc with retirement planning doesn’t it? Keep in mind, as Hussman noted, the United
States has been advising Japan how to “stimulate” their economy with deficit
spending and monetary easing.
Fortunately, our country
is blessed with natural resources while Japan is not. This should give us significant capability
for our economy to grow when compared to Japan, but make no mistake; the hole
our Politicians have put us in is massive and there will be long-term
consequences. Our Politicians must act
now to minimize the damage.
MARKET RECAP
Monday the S&P 500 was UP 1.2% to 1430 (rounded). VIX was down 4% to 16.34.
NTSM
Monday the NTSM analysis remained HOLD.
MY INVESTED POSITION
Based on the SELL signal, 7 November 2012, I
moved out of the stock market at 1377 on the S&P 500. Because of the extreme negativity I have
noted from Hussman and others, I am currently invested in a range of near 15%
invested in stocks and I am still holding short positions.
