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Conditions Of New Bull Markets: Recession at Trader’s Narrative

Here is the second installment of the conditions that precede new bull markets, as put forward by Jim Stack of InvesTech:

“Formal” Recession - confirmed (not just feared) by media headlines. Once again, this reveals the importance of being a contrarian investor… buying when no one else wants to. Historically when you see “RECESSION!” in the media headlines, it has often been the time to back up the truck to start loading up on stocks.

According to the data from Google Trends, there was a peak of “recession” headlines or mentions towards the end of January 2008:

google trends recession May 2008

I thought there was an increase towards the end of the year in 2007 but that was before the rate again doubled within the first month of the new year. You can see the same chart for mentions of “recession” before the spike in January.

But whether we are or were in a recession depends on who you ask. The most accepted answer comes from the National Bureau of Economic Research (NBER) and they have yet to confirm anything. But they always do so after the fact, which isn’t all that helpful anyways.

According to the Conference Board, the “data certainly reflects a weak economy, but not one in recession”.

The Recession Buy Indicator
The Recession Buy Indicator is an intriguing indicator used the veteran stock market newsletter writer, Norman Fosback. It is made up of four indicators which are “coincident” - that is, neither leading or lagging but a measure that moves at the same time as the economy.

These four are: manufacturing and trade sales, personal income, non-farm payrolls and industrial production. These are the same measures used by the NEBR to pinpoint recessions.

According to Fosback, there is a buy signal when each of the components is below its rolling 6 month high. That is the case right now since the coincident index has not gone up since October 2007.

Coincidentally I wondered out loud back in mid September 2007: Are we in a recession already? That may turn out to be accurate.

This Recession Buy Indicator gives infrequent but very good buy signals. There have only been only 4 in the past 30 years but they provided 30%+ annual returns on average. The validity of this indicator comes from the historic pattern of the stock market hitting a major bottom approximately six months after the economy enters into recession.

Like all historical patterns though, we don’t have a guarantee but a picture from the past that this is what has happened on average. The exceptions are important. For example, this indicator gave a buy signal in February 2001, which if followed, produced a tremendous amount of loss and pain. The stock market bottomed almost two years later in early 2003.

It’s difficult to tick this condition off as being met since the NEBR has not officially labeled a recession. It may or it may not. But going by everything else, it would seem to have been met.

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