Recession Prediction: Are Markets in Denial?

Posted On June 18, 2018 2:07 pm

Today saw stocks open deep in the red, only to bounce back and close with back with just minor losses. “Buy the dip” still seems to be the mantra, and still seems to be working. But for how much longer? Today we look at a troubling recession prediction that suggests that The Markets are in Denial.

If you watch the mainstream business media frequently enough during the day, you will be reminded, almost incessantly, that ‘stocks’ are at record highs, Amazon and Apple are fighting it out in the trillion-dollar-market-cap chase, and Netflix calls are safer than Treasuries.

Trade wars are shrugged off, slumping economic data is ignored, and the flaccidity of the broadest stock market measures is brushed off because only ‘losers’ don’t buy the biggest, momo-est, rich-est stocks because they’re a no-brainer.

However, reality is different from this utopia being constantly pitched at you. As former fund manager Richard Breslow notes, there is so much grumpiness out there today, that I almost feel an obligation to cheer everyone up. But I don’t want to.

Trade wars, political instability in places that shouldn’t be wobbling, enemies and allies alike glowering at each other and a whole slew of central bank speakers. Just not a lot to look forward to as we begin the week. Put that together with equity and fixed income markets that were showing such good vibrations yet suddenly need to fish or cut bait to avoid looking decidedly risk-off and you get the feeling that the most positive thing that could happen today is if nothing does.

There you go. I got it off my chest and feel better already. Now it is up to the markets to make the rest of you more sanguine because I fear you won’t get it from the powers that be. It isn’t asking too much. We just need a few levels to hold. And if recent history proves indicative of future results, there’s a pretty good chance.

But first, let’s separate the good from the bad.

Oil is sliding with WTI still having trouble at the $66 pivot. It’s a great level to set an alert for before going to do other things. And the Bloomberg Commodity Index is following suit.

Although there is a trend line that hints it is at a big level of its own. Sagging commodity prices may be pulling some equities down and I feel the pain of the ECB that it toys with their inflation forecasts, but I refuse to complain. Keep reminding yourself that these commodities are also just financial instruments. Up or down does not directly impute some great insight into the health of the global economy.

Equity markets look like they are in denial. They know their job is to go up, but their behavior at these levels is becoming sclerotic. They look ill without looking obviously bad. A more aggressive test of 2800 for the SPX looked in the cards last week and it certainly didn’t happen. Support at 2750 is just as big except for the fact that the Eurostoxx 50 and the Nikkei look very tired against their just as important resistance levels. My guess is that we will see how this plays out when the Chinese market reopens and we see what the Shanghai Composite wants to do down at 3000. They always seem to pick good days for a holiday.

 Related: Analysts Are Slashing Their Tesla Price Targets – And Here’s Why

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Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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