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I hope they’re wrong! Who? The smart people whose gloomy discussions I’ve been reading over the past few days. They make me nervous.
First, this morning we spoke with Jim Strugger, head of derivatives strategy at MKM Partners. He has been a very prescient caller of market direction based on his analysis of the volatility index, i.e., the VIX.
His work suggests a volatility spike is pending. And when asked if there is anything to change that outlook, his answer is “nothing”. And just for clarity, there is a very high correlation (above 80 percent of the time) that a spike in volatility is associated with a fall in prices.
Second, a report from the National Bureau of Economic Research (NBER) -- the guys that date the bottom and top of economic cycles in the U.S. -- also lays out a gloomy possibility. There is a chart making the rounds (called U.S. Recession Probabilities) from the NBER that places a 100 percent (!) chance of an economic recession in the U.S.
According to the discussion, the current level of this index has always been followed by a recession. The chart can be found on the website of the St. Louis Federal Reserve, but suffice it to say that if you believe stocks anticipate negative economic activity, this isn’t a good "tell" for the markets.
Finally, those who have been around as long as I have should know the name of Richard Russell, a technical analyst who has been writing The Dow Theory Letter for over 50 years. He has made a few major calls over this career (and missed a few big shifts in direction as well). His technical work is based on among other things, the relationship between the Dow Industrials and Transports as well as his own index “The Primary Trend Index”.
He again reminded his readers this morning when discussing yesterday’s market decline that "all this is taking place within the confines of a primary bear market. And as long as one or both Averages -- Industrials or Transports -- remain below their September highs, the bear market will remain in force."
He does see the opportunity for some short-term bounces (including in a bellwether like Apple), but his overall strategy is to be wary.
As I said, I hope they’re wrong.