Making A Recession
August 30th 2007 16:21
Now there are genuine fears that the US economy will slip into recession if fears of the debt fall out continue. So what are the odds of a recession occuring?
James B. Stack of InvesTech Research writes:
'For the most part, we’re in uncharted waters when it comes to the housing sector, and the boom-to-bust unwinding has been underway for over 18 months.
Then there’s the unpredictable Dow Industrials. Just a few weeks ago, the DJIA plummeted 800 points in less than 6 trading days and declining stocks overwhelmed advacing stocks. That type of negative breadth divergence has occurred only 15 times in 75 years – the majority of which were in bear markets.
Even in July, when the DJIA hit a record high, declining stocks overwhelmed advancing stocks by a 2:1 margin. That ominous divergence has never occurred in the past 75 years of market history.
Divergences are also appearing in major indexes, as the headline-grabbing DJIA has risen over 1000 points in the past five months – but the small-cap Russell 2000 Index has slipped lower.
If that isn’t a flight to quality, I don’t know what is!
As a consequence, I am moving to a full bear market defensive mode.
[...]
Historically speaking, we don’t like the current investment odds. We are not saying the bull market cannot hit new highs, but the monetary climate and economic pressures are making the next 12 months particularly hazardous. Moreover, the Federal Reserve has a dismal track record of achieving a “soft landing.” Out of ten past tightening cycles, only two resulted in a soft landing that allowed the Federal Reserve to ease and avoid a recession. And one of those (1966) still resulted in a bear market. Of the three bear market exceptions (1958-60, 1977-80, 1994-95), all experienced a significant decline in the stock market--just not enough to qualify as a -20% bear market.'
The current situation is just messy. Bulls? Bears? Optimists? Pessimists?
Eventually the market will unfold itself to find the level that it ought to be at, after charting through much of unnecessary territory. After all the market is the act of the people, and people have fears. Why? The odds of risks.
James B. Stack of InvesTech Research writes:
'For the most part, we’re in uncharted waters when it comes to the housing sector, and the boom-to-bust unwinding has been underway for over 18 months.
Then there’s the unpredictable Dow Industrials. Just a few weeks ago, the DJIA plummeted 800 points in less than 6 trading days and declining stocks overwhelmed advacing stocks. That type of negative breadth divergence has occurred only 15 times in 75 years – the majority of which were in bear markets.
Even in July, when the DJIA hit a record high, declining stocks overwhelmed advancing stocks by a 2:1 margin. That ominous divergence has never occurred in the past 75 years of market history.
Divergences are also appearing in major indexes, as the headline-grabbing DJIA has risen over 1000 points in the past five months – but the small-cap Russell 2000 Index has slipped lower.
If that isn’t a flight to quality, I don’t know what is!
As a consequence, I am moving to a full bear market defensive mode.
[...]
Historically speaking, we don’t like the current investment odds. We are not saying the bull market cannot hit new highs, but the monetary climate and economic pressures are making the next 12 months particularly hazardous. Moreover, the Federal Reserve has a dismal track record of achieving a “soft landing.” Out of ten past tightening cycles, only two resulted in a soft landing that allowed the Federal Reserve to ease and avoid a recession. And one of those (1966) still resulted in a bear market. Of the three bear market exceptions (1958-60, 1977-80, 1994-95), all experienced a significant decline in the stock market--just not enough to qualify as a -20% bear market.'
The current situation is just messy. Bulls? Bears? Optimists? Pessimists?
Eventually the market will unfold itself to find the level that it ought to be at, after charting through much of unnecessary territory. After all the market is the act of the people, and people have fears. Why? The odds of risks.
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