In the land of the blind, the one-eyed man is king.
I know I already wrote my Market Thought post for the day, but quite frankly, the very aggressive ECRI recession call has been bothering me since I saw it on CNBC. (Simply does not jive with data, especially the Baltic Dry Index.) Since then, I have been looking at leading indicators, and trying to assess them individually to confirm my original thesis that 'special circumstances', like the Fed twist or specific (but controlled) easing from China or something was skewing the results.
I was combing the chatter today, and came across this blog post that posted the ECRI Weekly Index, which saw the index pointing to recession. The below chart is from the article.
I did not understand why so many of the big boys were scared. This was the data point I did not have access too, but regardless, my thesis that the rally would continue was correct, and the market rallied hard after testing the SMA. Looking at the above chart, now I understand why they were ALL scared.
So, a few weeks ago a similar ECRI index set up was achieved, except the market is completely broken down technically. And I am willing to wager, the reason ECRI is so aggressive with their call this go around is very much to do with the breach of the March 2009 rally via the 360SMA. (The stock market is viewed as a leading indicator. A broken market suggests a broken economy.)
Here is where I am finally able to call BULLSHIT on the fear of recession, and side with Buffett.
In 2010, the market correction was predicated on issues with the EU, issues that were fixed with band-aids allowing the markets to rally. However, now, the EU issues could no longer be contained due to the bank runs. The potential EU induced credit freeze alone is enough of a shock to the equities markets, but the SP500 has about a 100 point decline because of the US debt downgrade. The down grade came right before we started seeing signs of EU bank runs, which eventually caused the markets to completely breakdown technically.
The markets would not be broken down technically, if Standard and Poor's did not downgrade the US. This downgrade holds absolutely ZERO economic effect. It only effects the momentum whore traders that actually give a rats ass about these technical levels. (And entities forced to sell due to their by-laws.) The massive volatility we are seeing would have been seen on the 360SMA, not below it, ultimately maintaining the trend.
Basically, I think ECRI's conviction is very wrong with their recession call.
I know the above sounds really bullish for the equity markets, and I think it is. However, once the EU bailout plan is announced, the rating agencies will downgrade a few EU countries. France is most likely a target, and maybe even Germany. Potentially capping upside, until this is washed out. But worst case scenario market action, IMO, can be removed.