Market Overview

Recession Forecasts at Odds With Bullish Formations

Despite mounting evidence supporting recession forecasts, the stock market remains at odds with that outlook. This leaves investors in a predicament of avoiding a further drawdown in the equity markets but not wanting to miss out on a potential recovery.

It is hard to argue with the recession forecasts that currently proliferate the headlines. For example, Simon White from Bloomberg makes an important observation:

LEI vs. S&P 500 Chart

The Leading Economic Index is a significant indicator. In particular, we monitor the 6-month ROC in the Index as it highly correlates to corporate earnings and has a perfect track record in forecasting recessions. Both the 6-month ROC in the LEI and our broad Economic Composite Indexsuggest a recession is imminent.

EOCI vs. LEI 6-Month ROC Chart

In the most recent report, the Conference Board issued its recession forecast regarding the sharp drop in the Leading Index.

Yet, despite the data supporting the recession forecasts, the market continues to disregard those warnings.

Bullish Formations

The market has continued to trade higher despite falling earnings and weaker outlooks. Notably, several bullish formations are occurring that historically denote higher prices over the short- to intermediate-term. For example, the compression of prices between the downtrend line from the January 2022 peak and the rising lows since October was an important focal point for investors. Such is shown in the chart below. That compression acts as a “spring,” and when prices break out, the subsequent move tends to be pretty powerful.

GSPC Chart

As you will note, since January’s market peak, each attempt to break above the falling downtrend line was a leading to lower prices. The break above that downtrend line suggests that a pathway higher for prices is now occurring. While we do NOT have evidence of a clear sustained break above that downtrend, the risk of a remains elevated.

But, as shown below, several other technical improvements to the broad market are worth watching, which also defy the recession forecasts.

Since the October lows, the market has been building a rather substantial price base. The inverse pattern already suggests a market bottom has formed. A solid break above the downtrend line would confirm the completion of that pattern.

Furthermore, the 50-DMA is rapidly closing in on a cross above the declining 200-DMA. This is known as the and historically signifies a more bullish setup for markets moving forward.

GSPC Daily Chart

Lastly, overall is also improving markedly, with the number of stocks on bullish buy signals rising to the highest since March 2022.

Bullish Percent Index vs S&P 500 Index

Should we ignore the recession forecasts?

History Still Suggests Caution

While it is possible that some bad news, or an overly aggressive Fed, could cause a reversal to these bullish formations, for now, they continue to support higher prices. This seems odd given the negative flow of recession forecasts and deteriorating earnings data. However, historically, market prices tend to trough 6-9 months before earnings bottom. This is because the market anticipates outcomes and was the subject of this week’s post on

Equities EPS Lows in Past Bear Markets

There are plenty of reasons to be very concerned about the market over the next few months. Given the market leads the economy, we must respect the market’s action today for potentially what it is telling us about tomorrow.

However, while we should not discount the improving technicals, we can not entirely dismiss the recession forecasts either.

History is exceptionally clear about the impact of higher interest rates on economic growth, employment, and personal incomes. As we discussed in the there has never been such a thing as a

Fed Funds Rate vs Crisis Events

Crucially, a recession, or followed the last five instances when inflation peaked above 5%. Those periods were 1948, 1951, 1970, 1974, 1980, 1990, and 2008. Currently, inflation is well above 5% throughout 2022.

CPI Annual Inflation Rate vs. Recessions

Could this time be different? Absolutely,

The bullish formations in the market indeed show investors are hopeful of such an outcome.

Unfortunately, there is a lot of history that suggests otherwise.


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