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  • Writer's pictureSteve

The Market Was Talking Earlier This Year

An old Wall St. joke is that economists have predicted nine out of the last five recessions.  And, for what seems like forever now, economists, financial media, and your friends have been telling you a recession is coming!  I've heard it from clients all year.  And just look at the headline below:

No less a source than Bloomberg News told you, exactly one year ago this week, that an economic recession was a 100% probability.  100%!!!!!  And yet, here we are a year later, no recession and the S&P 500 up ~12% YTD.  Despite 9% inflation, the highest interest rates in 22 years, Russia invading Ukraine, nasty U.S. politics, a banking crisis and now a Middle East flare-up, we still have no recession, and a nicely positive year going.

Indeed, consider a 1988 study by Cutler, Poterba, and Summers entitled "What Moves Stock Prices," where the authors reviewed stock market price action after major economic, political, and other types of events in order to develop a model through which one would be able to predict stock price movement.  What did the study find?  "Macroeconomic news explains only about one fifth of movements in stock market prices.  In fact, many of the largest market movements... occurred on days where there was no major news events."  They concluded, "there is a surprisingly small effect from big news of political developments... and international events."  In short, get your head out of the newspaper if you want to know how to invest.

What do we and did we do instead?  We listen to what the market is telling us.  Remember back in January when I wrote that multiple price/volume indicators such as Breakaway Momentum and a Whaley Breadth Thrust had triggered?  Then I followed that up in April with a remark on a Zweig Breadth Thrust.  Those signals came independently of political or economic events.  Just data.  What did they say?  The market would be up 6-12 months from the date of trigger.  What happened?  The market is up ~10 months from when the first signs triggered.  The data had no idea what was going on in the world at the time.  Inflation?  Interest rates?  Foreign invasions?  Data don't care.  So again, I implore you, as I have said again and again over the years, don't listen to the news.  Listen to the market, it's talking to us, just not in the way you probably think it is.  

Above is the Whaley Breadth Thrust data from January.  Note the last signal 1/12/23.  We're sitting at about 200 "trading days" since then.

Breakaway Momentum data.  Again, the signal was triggered January 12, 2023.  Our portfolios have stuck with a long bias since January and, so far, it's been the right call.

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