Cycle Trading

[Duma]

There has been a lot of articles of late trying to pin point when the writers thought that our economy would go into a recession. Of course it would be expected that the stock market would also go into a “recession”.

The almost universal definition of a stock market correction is -20%. Any thing less than that is considered just a pull back. So with the S&P sitting at -8.4% from the top, we are a long way from a correction. The NASDAQ, not so far at -16.1%.

The S&P has yet to breach a -20% with its max drawdown of -13.1%. However the NASDAQ has reached -21.1%. This week hurt both indexes a lot.

I have started working with Fisher Investments and I have to say I really like what I am seeing. The part I want to talk about today is their take on where the market is today. They claim that they will take corrective action if and when a correction is in place, but until that happens it is full steam ahead. They also talk a lot about the anatomy of a recession as have plenty of others. The best way to understand what to expect when a recession hits, is to analyze what happened with other recessions. This is why I love technical analysis because history does help us to understand the possibilities for investing in the future. You know the saying, “Those who fail to study history are destined to repeat its failures.”

So with that as a background, the chart below shows our two past recessions from the top to the bottom (only for 2007/9). The 2007/9 recession lasted 17 months for a total of 356 trading days. The 2000/2002 recession lasted 30.5 months and 638 trading days. I chose to truncate the chart at 365 days, as I am only interested is seeing how 2022 is doing in comparison. Day zero on the graph is the high point before each recession started.

For the 2022/202? recession (if it happens), it is only 73 trading days long so far and as you can see from the graph is very typical of the other recessions. So what Fisher (and others) are saying is that if there is going to be a recession, it is not affecting the stock market yet to any major degree. And according to this chart it could easily be towards the end of the year or into next. And that is exactly what a lot of writers are predicting.

So based on this I am starting to revise how I want to trade for long term accounts. As I have posted my current long term charts will trigger about -10%. As you can see one would expect a whipsaw which I did get.

So as a result I have losses that are a bit more than the S&P, but I am really not so concerned. First the market is making another drop now. And the second comes from several famous investors who all say the best way to make money is to not lose a lot. One of the all-time investing legends was Benjamin Graham who lost everything in the 1929 recession. He was Warren Buffett’s professor at Columbia Business School.

For sure it seems like it is not time to panic too much. A 20% loss is not that hard to come back from, only 25% gain needed. A 50% loss requires a 100% gain.

See post I responded to for more data on corrections.