T’was me
RecessionAlert.com is pretty useful and so is
FWIW: Mojena has gone to a “sell”
BTW I have the NDR (Ned Davis Research) 2015 Outlook. Its not online - only available by subscription.
Email me directly and I’ll send it to you.
Brad
[quote]
Chipper - It doesn’t appear that the NBER recession graph has been of much use since 1980. The logarithmic graph shows 1987 and 2000 as wee little blips, where in fact the drawdowns were huge. So one out of the last three crashes/bear markets were picked up, but as was stated, the 2008 recession was not declared until long after the fact.
Steve
[/quote]Steve,
There are two important points that you are making and each one needs to be addressed separately. Your first point is of the three most recent crashes it only picked up the financial crisis crash but it missed the 1987 crash and it was only out of the market for a short blip in the dot-com crash. You know what? It won’t get you out every time (what will?) but it did help a lot even for these three most recent crashes!
BTW, the 1987 crash was not caused by a recession. Neither was the 1962 crash. But both of those recovered almost as fast as they went down and during those two crashes MA indicators would have gotten whipsawed too unless you were lucky. No timing system is perfect but even over the past three recessions it did seem to help! That’s why I like economic indicators better than MA indicators. I will grant you that the economic indicators would have missed 1940 while a MA indicator would probably have picked it up. That’s one time out of more than 14 crashes that a MA indicator would have worked better than economic indicators.
Your second point is that the NBER doesn’t announce recessions until long after the fact. That’s correct and therefore we need to use a different indicator that signals recessions faster. Luckily we have some good data and tools now to build economic indicators with, or you can subscribe to a service that is (hopefully) proven to be accurate.
Chipper - I agree that MAs are not the answer. I just have trouble using something that doesn’t seem to be relevant to my trading over the last 30 years. I personally experienced the 1987 crash (unlike the talking heads that seem to think the current oil situation is a crash beyond all others - what a laugh). I remember people at the time indicating that it had no tie to the economy but I can tell you it would have been one heck of a lot better sitting on the sidelines waiting to jump in rather than sitting through a 30% loss. It took over a year to recover, so a lot longer than the crash itself which was 1 1/2 days.
The blip I was referring to was the drawdowns, not the short time a recession was declared in 2001. Which leads me to something else I am having trouble with… what I am hearing about bear markets deriving from recessions. The stock market is a leading indicator. There is something called the wealth effect. When you have a bubble burst and the general population clams up (stops spending) because their investments are in decline, they no longer feel wealthy and they stop spending, resulting in a recession. So in all probability the stock market decline drove us to recession in 2001. The housing market burst probably drove down the stock market and led us into recession in 2009.
I honestly don’t believe it is as straightforward as saying there is no imminent recession thus there can be no bear market.
Steve
Well said Steve, agree completely.
Steve, I don’t know if bear markets cause recessions or if recessions cause bear markets or a little of both depending. But I do know that when earnings are shrinking it has often been prudent to hedge–if earnings are still shrinking. I also know that many economics theories would have been tossed out if we had better ones. The way the textbooks describe science, you would think that if a theory makes predictions that don’t come true then the theory would be discarded. Yet life doesn’t work that way. Many theories have predicted things that didn’t come true and yet those theories are still taught as gospel. So while I try to understand the theories when necessary, I do take all economic theories with a big grain of salt. In fact I believe that is your approach to creating trading models as well; to find what works instead of trying too hard to model the theories.
Hi Denny historically high leverage is causing whipsaws in technical-based systems. As selloffs begin they occur deeper than would otherwise be the case. This creates sell signals that often whipsaw. Keep an eye on systemic portfolio margin.
Recessions occur when an economy corrects excesses that have built up. Usually, these excesses occur somewhere in the business sector. But it’s possible they may occur in the financial sector as well, as we saw in 2008. The reason they are typically so hard to spot before the fact is that we aren’t always sure where we should be looking nor are we sure when an excess has occurred (i.e. how much inventory is too much, how much debt is too much, how high a commodity price is too high, etc.).
As to bear markets, they traditionally come ahead of recessions as markets anticipate the upcoming decline in earnings. Stock-market recoveries, too, tend to start ahead of business recoveries as markets anticipate the upturn in earnings by noticing the excesses being wrung out of the system. (If anything about a recession can be entertaining, it would be watching the gurus and talking heads; you can always spot the ones who really have no idea what they’re talking about – they’re the ones who are screaming, whining, ranting, bleating etc. because stock prices are soaring even though earnings aren’t and even though PEs, computed based on exceptionally depressed EPS, are sky high.)
One thing that makes things so tricky for market timing, even the widely used concepts that allow hindsight simulations to “avoid” the big 2008 drawdowns is the market is a discounting mechanism; it trades based on future expectations, not on what’s happening at the time. The other problem is that expectations don’t always pan out – case in point, the big 2011 drawdown that occurred in response to the Euro crisis, the Arab spring, the Washington budget mess, etc. – a collection of events that led the market to jump the gun and trade for a while based on assumptions of an upcoming recession, assumptions that turned out wrong and which caused the market to snap back later in the year.
That’s why it’s a heck of a lot easier to post a sim showing market timing success than it is to time the market ahead of the fact with real money in the real world.
“That’s why it’s a heck of a lot easier to post a sim showing market timing success than it is to time the market ahead of the fact with real money in the real world.”
This is why our biggest drawdown is in front of us.