Fall 2012: Prelude To Recession

In my opinion, the U.S. economy has begun a slide into probable recession. This prediction is based on a technical reading of the major stock market averages (Dow Industrial, Nasdaq, S&P 500) as well as analysis of several recent shocks to our economic system. I have "called" these economic movements in the past and occasionally been correct about them. I want to give you, the reader, an opportunity to understand what I'm seeing, so I will use this blog to explain the analysis that happens behind the predictions.

In stock charting, we don't just show the price points making up the chart. We usually also draw a line on the chart showing the average price of the last 50 trading days. Additionally, we draw a 200-day moving average. Taken together, these moving average lines depict the longer-term direction of the price that is being tracked.

In a healthy stock market, the prices of the major indexes stay above their 50-day moving average lines (and the 50-day moving average lines stay above the 200-day moving average lines). This indicates the price is increasing and its long term trend is upward.


Thanks to stockcharts.com

Here is a daily price chart of the S&P 500 Index from late May 2012 to the date of this blog post. We have healthy behavior in portion 1, within the green circle, where the daily price lines are moving upward above the blue line, which is the 50-day moving average line.

A few weeks ago, in portion 2, (yellow circle) we have a warning indicator. The daily values have dropped below their 50-day moving average, but they are still above their 200-day moving average. Stocks and indexes occasionally bread down below their 50-day moving averages but then recover above them. That is not what has happened here.

A few days ago, in portion 3, (red circle) we see a serious warning that the S&P 500 index may have begun a longer-term downward trend. The daily values have crossed below their 200-day moving average. Notice that the index has remained below the warning level for several trading days. The Nasdaq 100 and the Dow Jones Industrial average are both also below their 200-day moving averages and have been there several trading days longer than the S&P 500 index has.

so we start with the facts - reality - the three major indexes have all fallen into the danger zone, and have not recovered so far. To be sure, there have been occasions in the past when they all crossed below the danger thresholds then recovered back up into healthy territory. On the other hand, every recession in this country dating back at least to the Great Depression, has been signaled by the major indexes of the day slipping below their 200-day moving averages and not recovering.

In concert with the stock market danger zone, we have: 1) the "fiscal cliff" of tax hikes and federal spending cuts looming, 2) continuing uncertainty regarding solvency in Europe, 3) a recent swell of unemployment due to the destruction from Hurricane Sandy, 4) thousands of troops returning from foreign wars also joining the pool of the unemployed, and 5) Atlas Shrugged - in the form of pissed off Republican business owners retaliating for four more years of Barack Obama by cutting hours and positions to protest what they see as a slide into Socialism.

A deal on the fiscal cliff would certainly give a positive jolt to the economy but it remains to be seen whether that, alone, would provide enough impetus to restore it to the path of slow, gradual growth it had been on prior to November.