US Portfolio Strategy -

Erica Szczech - Jan 11, 2016
There is only one rule of thumb when piloting an aircraft in difficult conditions: trust your instruments. It doesn't matter how wrong it feels or looks outside, you have to trust them, or you compromise your progress and potentially compound the pro

"Echo crash" leads to bottoming process, by Tony Dwyer

There is only one rule of thumb when piloting an aircraft in difficult conditions: trust your instruments. It doesn't matter how wrong it feels or looks outside, you have to trust them, or you compromise your progress and potentially compound the problems. Although seemingly at high risk, our fundamental and tactical instruments are suggesting fear may well be worse than reality. Since the "Great Recession", we have gone through a number of recession scares, but have averted one due to accomodative Fed policy, a positive yield curve, and moderate economic growth despite regional global turmoil and pronounced weakness in the commodity-related areas.

 

We belive a 2011 comparison may be valid. Similar to the "echo crash" week in November 2011, when the SPX dropped roughly 8% in eight days, the current market has seen a sharp drop following a strong recovery from the August 2015 crash.  Both the current and 2011 "echo crashes" were the result of a surprise announcement that threw the global currency, fixed income and equity markets into chaos.

 

A unique study reinforces our viw of bottoming process and no recession. There is growing fear that a recession must be close given the pronounced weakness in crude oil, and the segment of the market that stands to benefit the most from it - the Dow Jones Transportation Index (DJIT). According to our partner at Sundial Capital, when these two indices have made a new 52-week low within a month of each other, it has been a better buy than sell signal. This has only happened six prior times since 1983, when Crude Futures began to trade. Since 1983, all six instances showed a positive SPX return over the next month, with a median gain of 5.4% which suggests a close over SPX 2,000 by Monday January 18. It si intersesting to note that only the 2008 occurrence was in the context of a recession, and even then it was in the tail stages and not a leading indicator of economic weakness ahead.

 

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