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Tracking the Market Low-Point

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·5 min read
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Are we in a recession or not?… a crude calculation suggests we’re at or near the market-low… more signs of a bottoming from our technical experts … but don’t get too bullish yet

And just like that, “recession” is the new “Lord Voldemort.”

For all you non-Harry-Potter fans, Lord Voldemort is the villain who’s so feared, he goes by the nickname “He Who Must Not Be Named.”

In a loose parallel, this is the “Recession That Must Not Be Admitted.”

For as long as I can remember, the commonly used definition of a recession was “two consecutive quarters of negative GDP.”

Yesterday, we learned that this is the situation in which the U.S. economy finds itself.

But this time around, don’t call it a recession (especially if you’re Treasury Secretary Janet Yellen, who claims there are no signs of a recession anywhere).

Despite these two consecutive GDP contractions, a slew of analysts and politicians are enthusiastically denying we’re currently in a recession.

To be fair, they’re not completely off-base. Today’s economic environment doesn’t share some of the characteristics of past recessions: most importantly, a heavy loss of jobs coming from a variety of economic sectors.

So, despite our jest, there is a case for the U.S. economy not being in a traditional recession.

Frankly, the technicalities aren’t all that important. We agree with our trading experts John Jagerson and Wade Hansen of Strategic Trader.

Here’s their take:

…What really matters is if traders and consumers think we are in a recession, which they do.

What the numbers say is less critical than how people are going to behave.

That said, investors should be crossing fingers that we are in a recession. Here’s why…

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***A few weeks ago, here in the Digest, we tried to back into the timing of when stocks will bottom out

In doing this, we highlighted a report from Goldman Sachs suggesting that the low point in the stock market usually comes three to six months before the economy’s low-water mark.

Okay, so how do we pinpoint the economy’s low-water mark?

Using data from the National Bureau of Economic Research, I looked at the average peak-to-trough length of time of U.S expansion/contraction cycles since 1945.

The number came in at 10 months. I’ve read other reports suggesting the average duration is about 11 months. Let’s go with 11 months, to be cautious.

So, when did the U.S. economy see its most recent peak?

The last positive GDP reading was Q4 2021. We don’t know when exactly, within that quarter, the economy topped out. To make it easy, let’s pick the halfway mark, so mid-November.

Eleven months from mid-November is mid-October. So, this, theoretically, will be our economic low-point.

From there, according to Goldman, we backtrack 3-6 months to find our stock-market low.

Doing this suggests a target range of mid-April to mid-July.

Translation – stocks are in (even possibly beyond) their low-point.

If you’re more of a visual person, here’s how this maps out.

Chart showing a layout of when the bear-market-low might be in relative to a recession timing
Chart showing a layout of when the bear-market-low might be in relative to a recession timing

Now, we need to take this calculation with a huge grain of salt.

It’s crude and based on historical averages that might be wildly different than today’s economic and stock-market reality.

Plus, remember: This is a Lord Voldemort recession, meaning we might not even be in one.

Given all this, are there any other signs suggesting we’re near a bottom in the stock market?

John and Wade say “yes.”

***Another clue that we’re nearing the bottom

If you’re new to the Digest, John and Wade helm Strategic Trader, InvestorPlace’s premier trading service. It combines options, insightful technical and fundamental analysis, and market history to trade the markets, whether they’re up, down, or sideways.

In their update from Wednesday, they pointed toward data suggesting we could be nearing (or even beyond) the market low.

From John and Wade:

The data that has been streaming in recently has been shifting between extremes of surprisingly bullish or alarmingly bearish.

Although frustrating, there is a bright side to this situation – a split in sentiment like this generally happens at or near market bottoms.

For example, on Monday, Walmart Inc. (WMT) shocked everyone by announcing that management expects the retailer’s profits to decline by 11-13% this year. The stock dropped by more than 10% on the news, dragging most other discount retailers with it.

However, on Tuesday, Texas Instruments Inc. (TXN) reported earnings showing $2.45 per share rather than the average expected earnings of $2.13. Additionally, the company increased their outlook for revenue and profits in the third quarter.

Walmart is a good proxy for retail spending and consumption, so it makes sense to use that company as a bellwether for the market.

Texas Instruments plays a similar role in the semiconductor group and the tech industry more generally.

TXN has the broadest product line and customer base in the group and is therefore a good indicator of what investors expect from tech in general.

***John and Wade are quick to point out that this earnings-divergence doesn’t mean the stock market is out of the woods

They even suggest that investors shouldn’t expect a big rally in August.

Part of the reason for this is something we’ve highlighted here in the Digest: If we exclude the energy sector, then earnings growth is likely to come in sharply negative this quarter compared with last year.

Back to John and Wade:

We feel it is important to be wary of the recent bullishness in the market. We are still leaning neutral in the market because the underlying fundamentals are so uncertain.

That said, there are also reasons for cautious optimism.

On that note, John and Wade point toward the 10-year Treasury yield, which has fallen hard in recent days. As I write, it’s now at 2.68%.

Here’s why this is bullish, from the Strategic Trader update:

The Fed can continue to raise the overnight rate and not affect long-term interest rates tied to mortgages, corporate borrowing, student debt, auto loans, etc. if they move slowly.

We are optimistic that the Fed’s actions won’t push long-term rates above 3.5%, which will support the tech and retail sectors.

Putting all this together, we don’t have an “all clear” signal, but that’s not what we’re looking for.

For now, we’ll be satisfied with clues that the tide is turning. And we’re seeing more data and indicators suggesting that this is the case.

Remember, the economy and stock market are different beasts that rise and fall on different timetables.

As gloomy shadows spread over the economy, that’s when we usually see daybreak out on the horizon for stocks. We’ll end this topic with a quote from analyst Sam Stovall that we’ve featured before in the Digest:

Prices lead fundamentals—therefore the stock market falling into a decline is traditionally an indication that most investors believe we are headed for a recession.

When we do finally fall into a recession, that’s usually a good time to get back into the market.

***Before we wrap up, a quick note…

For readers who haven’t been watching, crypto has been rallying in recent days.

This has been helping our experts Luke Lango and Charlie Shrem find pockets of strength that are worth putting on your radar.

With this in mind, I want to make sure you know something that’s happening tomorrow with Luke and Charlie’s Crypto Cash Calendar.

For newer Digest readers, here they are to explain what this Calendar is:

Crypto is the future. But that doesn’t mean all cryptocurrencies are the future.

To sift through all the blockchain noise, we’ve put together an exclusive team of crypto engineers and coders to collectively research, analyze, and understand the core technologies underlying the cryptocurrency revolution.

Informed by this research, we’re able to interpret the usefulness and potential impacts of those technologies.

Here’s how it works: Behind the scenes, our proprietary research system gathers information and indicates which altcoins and crypto events are of particular interest.

From there, we’ll share with you the most exciting and promising of those coins and events in our Crypto Cash Calendar

Tomorrow, Luke and Charlie are announcing an event that’s triggered their Crypto Cash Calendar system. I don’t have any details on what it is…but something is coming. And given the momentum that’s beginning to build in the sector, things could get interesting.

If you want to learn more as a subscriber, click here.

Have a good evening,

Jeff Remsburg

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