People Can Be Poor Judges Of A Recession’s End

Psst!  Have you heard yet?  The recession has finally ended.  Yes, and it did not end just now, but actually in June 2009!

As hard to swallow as this may be, such were the findings released on Monday of the National Bureau of Economic Research (NBER), an economic group whose job it is to determine when recessions begin and end.

This will be small comfort to the millions of people still struggling to find a job and make ends meet, to the single mother who is about to have her home repossessed and to my next door neighbour who was recently made redundant from his job after years of loyal service.

Yet, the finding by the NBER is official.  They reported that the economy bottomed out in June 2009 followed by a slow period of expansion.

So why is it that for many of us, the notion that the economy has pulled out of a recession (albeit over a year ago) is such a surprise and scarcely believable?

I am reminded here of the words of my fellow stock trader and friend, Richard Muller, during a light conversation at lunch:

“People are usually very good at foreseeing the beginning of a recession, but very poor at predicting its end.”

I can see now what Richard had meant.  Take a look at the weekly chart for the S&P500 (below), the index of the 500 largest companies in the world.

We can see visually that the market clearly bottomed out in March 2009, three months before the purported “end of the recession” in June.  In fact, most traders like me who use some form of technical analysis have been aware of this fact, and so the NBER’s findings were almost what we would have expected.

Moreover, this confirms what I had suspected all along:

the economy lags behind the stock market and the stock market is a leading indicator of the state of the economy.

However, investor sentiment – people’s perception of the state of the economy – seems to lag behind the economy itself.

As to why this phenomenon exists, I cannot be sure (and not something I can go into much detail at this point).  One suggestion could be that we tend to expect markets to obey some “common sense” and that downturns should be of equal length to “up-turns”.  However, this is not reflected in reality, as markets move much faster downwards than they do upwards – a fact that I will expand upon in later blog posts.

There were also other early signs of a market reversal.  The Relative Strength Index (RSI), which typically measures overbought and oversold periods of the market, was diverging with the market’s movement from October 2008 to March 2009 (see above chart).  While the market was making new lows, the RSI failed to do the same and instead began to make slightly higher lows.  Typically, when this happens, we can spot market turning points and reversals.

Therefore we could say that this was an early signal that the heavy sell-offs were losing their breath and the market was regaining its strength towards early spring of 2009.

There is a joke amongst professional traders that no two economists can ever agree about where we are in the economy – and when they do they seem to come up with the answer a year too late!

That is why I prefer to use the stock market itself as a far more reliable tool for measuring the economy.  The market does not lie – its up-ticks and down-ticks are there for everyone to see.  How we interpret those up and down ticks is another matter…

Perhaps you have a different opinion and maybe you disagree with me.  If so, I would love to hear from you.  Feel free to leave me your comments below.

13 Comments

  1. thanks man, nice update

  2. Hi Jack – thanks for your comment on my blog. Happy trading!

  3. Hi there – my myspace page is: http://www.myspace.com/alessiorastani

    Unfortunately, I haven’t been using it much, but I am planning to get more active on it. Feel free to join me on my trading community on facebook: http://www.leadingtrader.com/facebook

    Regards,

    Alessio

  4. Hi Alessio, hope you’re well. This is a nice site, haven’t navigated in-depth, but still good. I’ve just finished listening to your 1st October video blog, I would like to receive your free weekly updates on the markets too please; do you also post/send your trades via email too, as you do on Facebook? I ask as I’m both curious, and presently not on Facebook.

    I attended the Seminar on the 25th/26th of September, which I enjoyed thanks. I will be joining you on the 26th-28th of November, and would like to know the dates for the Flag Trading Course so I can take time off work to attend.

    Thanks

    Elekwa

  5. Hi Elekwa

    Great to hear from you and thanks for your comment.

    I don’t post my trades by email but if you go to http://www.facebook.com/alessiorastani (and click on wall) you can read my updates. You don’t have to be a member of facebook to see it – it’s a public page and anyone can see them.

    I will happily add you to my list so you can get my weekly video updates as well.

    Have great fun on the 3-day course – there is no live course for the flag programme, it is a video cd course.

    Cheers

    Alessio

  6. Thanks Alessio,

    I will check out the Facebook link. The way you said ‘Have great fun on the 3-day course says or suggests that you won’t be facilitating it….am I correct? Would be a shame if so.

    I would like to get the Video CD’s too please.

    I realise my comments do not have anything to do with your blog….and I may have more to say or enquire about further on down the line, would you rather this moves to another platform that might be more appropriate?

    Elekwa

  7. Hi Elekwa

    Thanks for writing back, I just got your email as well. I am going to email you the links and the details that you need.

    If you wish to contact me direct feel free to email me on: alessio AT leadingtrader DOT com (the reason I have written my email like this is to prevent the online computer robots from picking my email and spamming me).

    Cheers

    Alessio

  8. Hi Alessio

    I am a Just now started trading guy. I dont know much about Stock Trading. I am from Bangalore city of India & I am so happy reading your blog. It is really helpful. But i think i need more help & suggestions from you for success in trading.

    Hope you will do it.

    Thanks

    Hyder

  9. Hi Hyder,

    The best way to get started in trading is to master 3 things: 1) a very good trading strategy, 2) trading discipline and psychology and 3) how to manage risk.

    I send out a free weekly video which covers the most important markets and you can learn a lot from the way I trade. You can get the videos by emailing me on:
    Contact AT leadingtrader.com

    Best wishes for your success and thanks for your comment,
    Alessio

  10. What you wrote is terrible and I’m afraid it survive! In the spring I purchased fifteen thousand shares of CME Group for all the money our family and they fell fifty procent.A even if they fall, so I was a beggar….

  11. Hi Alessio,

    I’m not a trader or economist, but I think I have some common sence and what you say rings true – thanks for sharing. It remains for me to ponder if I should buy my first house now (I think my job is stable) or wait for house prices to fall with the economy…

    Nik

  12. Hi Nik, thanks for your comment. Even though I am not a property guy, I think it is only common sense that even now is still a good time to buy. A climate of fear is the best time to exploit to your advantage. If sellers think the prices will go lower they will negotiate. If they think market has bottomed out, they may not. Well done.

Comments are closed