INVESTORS BE CAREFUL ABOUT FLAWED RECESSION ANALYSIS

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By Nigam Arora & Dr. Natasha Arora

To gain an edge, this is what you need to know today.

Flawed Recession Analysis

Please click here for a chart of industrial select sector ETF XLI.

Note the following:

  • The chart shows the high that industrial stocks made in January 2022.
  • The chart shows that industrials are only 5% from the high even though the stock market is down significantly more.
  •  There are four parts to the business cycle:
    • Early cycle
    • Mid cycle
    • Late cycle
    • Recession
  • Right now, the economy is in the late cycle.
  • Historically, industrial stocks do poorly in the late cycle.  The reason is that in a recession, their earnings are hit hard.
  • The fact that industrial stocks are close to the high is being used by many analysts as proof that there will be no recession.  The analysts cite 50 – 100 years worth of data to prove their case.
  • Analysts are correct about the history, but their conclusion of no recession based on the performance of industrial ETF  is wrong.  The reason is the composition of  and special circumstances. Let us examine the top 10 holdings of XLI.
    • Four are benefiting from increased defense spending and aerospace. The four are RTX, BA, LMT, and GE.   and  are in the ZYX Buy Change Model Portfolio.  Aerospace and defense ETF  is in the ZYX Allocation Model Portfolio.  Defense and aerospace are attractive sectors.  To learn why aerospace and defense are attractive sectors, listen to the recording of the live event titled “A Forward Look At Investing 2023 – 2030”in the Arora Ambassador Club.
    •  has done especially well after the spinoff of its healthcare division GEHC.   is in ZYX Buy as a long term position in the portfolio that surrounds the core model portfolio.  There are nice gains on this position in a short time.
    • Union Pacific (UNP) is a railroad.  It recently fired its CEO, and several activists are in the company agitating for change.   is a special case.
    • Deere (DE) makes agriculture equipment.   is benefiting from government spending on infrastructure and also from high agriculture crop prices.
    • Caterpillar (CAT) makes construction equipment.   is also benefiting from government infrastructure spending.
    • Eaton (ETN) makes electrical equipment and components.  It is benefiting from electrification for electric vehicles.
    • The other two components are  and HON.  has done well because it restructured its operations.   is partially benefiting from defense, aerospace, and infrastructure spending.
  • The foregoing shows that  is benefiting from special circumstances and does not reflect the overall economy.  For these reasons, a conclusion from the performance of  alone that there will not be a recession is simply wrong.  This is an example as to why investors need to be very careful about the analysis from gurus highlighted in the media.  
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Jobless Claims

Initial claims came at 211K vs. 198K consensus.  From the Morning Capsules you know that initial claims have been very low, typically under 200K.  Stocks immediately jumped on the release of this data.  The buying is especially aggressive in tech stocks and junk stocks.  Investors are celebrating a jump over 200K. 

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 (To see the locked content, please take a 30 day free trial) stocks in the early trade.  Smart money is 🔒 stocks in the early trade.

Gold

The momo crowd is 🔒 gold in the early trade.  Smart money is 🔒 gold in the early trade.

For longer-term, please see gold and silver ratings.

Oil

The momo crowd is 🔒 oil in the early trade.  Smart money is 🔒 oil in the early trade.

For longer-term, please see oil ratings.

Bitcoin

Bitcoin is range bound.

Markets

Our very, very short-term early stock market indicator is 🔒.  This indicator, with a great track record, is popular among long term investors to stay in tune with the market and among short term traders to independently undertake quick trades.

Interest rates and bonds are range bound.

The dollar is weaker.

Trading futures is not recommended for most investors. The purpose of providing this information is to give an indication of the premarket activity that usually guides the activity when the market opens.

Gold futures are at $1826, silver futures are at $20.18, and oil futures are at $77.08.

S&P 500 futures are trading at 4004  as of this writing.  S&P 500 futures resistance levels are 4200, 4318 and 4400: support levels are 3950, 3860 and 3770.

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 futures are up 87 points.

Protection Bands And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.

Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider holding 🔒 in cash or treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of 🔒, and short term hedges of 🔒. This is a good way to protect yourself and participate in the upside at the same time.

You can determine your protection bands by adding cash to hedges.  The high band of the protection is appropriate for those who are older or conservative. The low band of the protection is appropriate for those who are younger or aggressive.  If you do not hedge, the total cash level should be more than stated above but significantly less than cash plus hedges.

It is worth reminding that you cannot take advantage of new upcoming opportunities if you are not holding enough cash.  When adjusting hedge levels, consider adjusting partial stop quantities for stock positions (non ETF); consider using wider stops on remaining quantities and also allowing more room for high beta stocks.  High beta stocks are the ones that move more than the market.

Traditional 60/40 Portfolio

Probability based risk reward adjusted for inflation does not favor long duration strategic bond allocation at this time.

Those who want to stick to traditional 60% allocation to stocks and 40% to bonds may consider focusing on only high quality bonds and bonds of five year duration or less.  Those willing to bring sophistication to their investing may consider using bond ETFs as tactical positions and not strategic positions at this time.

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This post was just published on ZYX Buy Change Alert.

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Picture of Nigam Arora

Nigam Arora

Nigam Arora is known for his accurate stock market calls. Nigam is a distinguished master of the macro. He is a popular columnist with over 100 million page views, an engineer, and nuclear physicist by background. Nigam has founded two Inc. 500 fastest growing companies and has been involved in over 50 entrepreneurial ventures. He is the developer of Theory ZYX of Successful Change Management and is the author of the book on Theory ZYX, as well as the developer of the ZYX Change Method for Investing.

Picture of Dr. Natasha Arora

Dr. Natasha Arora

Dr. Natasha Arora has significant expertise in investment analysis especially biotech, healthcare, and technology. Natasha is a graduate of Harvard Medical School followed by a postdoc at MIT. She has published several peer reviewed research papers in top science journals.

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