In a time like this, it’s crucial to pay close attention to economic data.
Even more crucial is your ability to interpret it into winning trades.
Some traders are happy to ignore the bigger picture and just focus on their market analysis.
But this is a critical mistake…
See, bear markets associated with weak economies are significantly worse than other bears. On average, losses are twice as steep.
So, managing risk in a bear market means always keeping one eye on the economy.
Right now, inflation is an obvious problem. High prices could choke off consumer spending and spur a recession.
Economists like to use complicated models to determine whether or not we’re in a recession. But my Greed Gauge has one more ace up its sleeve…
When applied to GDP data, it can accurately predict recessions.
And what it’s saying now will surprise you.
Are We in a Recession?
Take a look at the chart below.
The black line is GDP. The blue line is the S&P 500. Each goes back 50 years.
The Greed Gauge, at the bottom, is applied to the GDP numbers. As you can see, recessions coincided with — and in some cases were predicted by — bearish readings.
(The few false signals were associated with stock market turbulence, like in 1987 when the indicator turned red before the crash.)
Remember that the Greed Gauge is simply an accurate measure of momentum. That means we can apply it to the broad stock market and individual stocks, but also economic data.
It takes time for economic trends to reverse. But what this shows us is momentum in GDP almost always reverses before the stock market follows.
Say buyers are frantically rushing into a market. This pushes both prices and momentum up.
Soon, though, buyers act with less urgency. This leads to a slowdown in momentum, even as prices continue to rise. Finally momentum turns down, followed by prices, as buyers turn to sellers.
Economic data follows a similar pattern. Consumers are the primary driver of the economy. They account for about two-thirds of economic growth.
When consumers turn cautious, momentum slows. When they stop spending altogether, recessions start.
It’s really that simple.
Economists will always prefer their more advanced modeling techniques. But with momentum tools like the Greed Gauge, we can stay one step ahead of them…
Right now, momentum is slowing. So while a recession is likely in the next year, I don’t believe it’s already started.
Consumers are still spending. Unfortunately, much of that spending is at the gas station. If gas prices don’t head down in the next few weeks, we should expect to see consumer spending slow.
That would trigger a recession, possibly starting before the end of the year.
The Greed Gauge is urging us to pay close attention to the economy. If you want to stay up to date on its latest readings, click here.
Michael Carr, CMT, CFTe
Editor, True Options Masters
Chart of the Day:
The Most Important Chart in Every Market
By Mike Merson, Managing Editor, True Options Masters
The plain fact of the matter is, any risk asset is likely not going to do well this year if the dollar continues climbing.
And it looks to me like the dollar’s climb isn’t slowing down. In fact, it may even start to accelerate.
We’re looking at a biweekly chart of the dollar today, and observing the recent breakout on the far-right side. The dollar came all the way up to its early 2017 high, broke it, spent a month reversing, and is right back at it in today’s trading.
Going off history, when the moving averages were previously arranged like this, it led to big rallies in the dollar. Just look at 2014 for the perfect example.
Unless the dollar really starts to sink — and that means breaking down below the 100 level — you’re going to have a tough time being bullish stocks here. Tread carefully.
Managing Editor, True Options Masters