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Tuesday, July 17, 2012

Market Thought... a bullish recession?

ECRI has been projecting a recession since September 2011.  Today I read an article that references them, and states the US is already in a recession.

Of course, ECRI's premise is predicated on the accuracy of their leading indicators. Frankly, since Sept 2011, their public calls have been far from accurate.  IMO, the reason for this is that the market is ignoring many indicators. (Or so I have noticed over the past few months. Hence my own crappy trading.)

Over the past few months, the equities and treasury market have only cared about one number, US employment. Since April, the employment number has been crap, and we have seen some very significant multiple contraction across a wide range of equities. The treasury yield is also retesting its lows.

The markets have endured a research shop that is widely respected on the street, severe multiple contractions across multiple sectors, along with enduring the rise in popularity of the end-of-the-world-folks. Yet through all this, the SP500 has maintained its trend.

The equity market is still chewing on a +10year multiple compression. Yes, +10 years.

Over the next few weeks, we will get our answer.  First, we have earnings. Companies will give us the data points we need to confirm whether or not these multiple compressions were merited. Second, I will look to jobs.

My thesis is that the hiccup in jobs brought the economy, hence market, to this hiccup. If the jobless claims continue to perform the way they did last week, re-establishing the downward trend, the number will be reflected within the employment situation.  Once the positive numbers are reported, the markets will rally.  Over the past few months, the market has been lagging the employment situation. (The behavior of the market w/respect to the number only proves the number is now the most important leading indicator.)

If the market acts negatively, or flat, but the above trend continues to go lower, I will to trade for a bullish Employment situation number.

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