Economic Cycle Vs Stock Market Cycle

March 23, 2023

I’ve shown this chart before, but I keep going back to it for reference to a typical economic cycle vs a stock market cycle.

I’ve read stories that say we’re heading for a recession that will happen faster and be worse than in 2008. I understand the rationale that interest rates are sky-high and personal loans/credit is also on the rise. It’s a fine balance before people can’t pay the interest on their credit and the whole thing comes crashing down.

On the other hand, unemployment is low, and the market has been resilient to most of the bad news that has come out lately. It may not seem that way when the market drops over 500 points in 45 minutes like we had the other day, but that was a brief news cycle that we will quickly forget.

Look again at the chart above. What starts to go up in an early bull market?

I get that financials are a mess right now, but in an early bull market stock cycle, transportation and technology come into focus. Manufacturing improves, things are shipped out, and technology helps eliminate waste and reduce costs.

So, are we in the early stages of a bull market? I’m not saying that, no, but, let’s look at the Nasdaq 100 (QQQ).

The technology-heavy sector is up 22% off the October lows.

Now, let’s compare that to the S&P 500 (SPY). It’s up a modest 13% during the same time period.

And the Dow 30 (DIA) is in a similar camp, rising 12%.

There are some companies in the transportation industry, like ZIM Integrated Shipping (ZIM) that have already rebounded by 50% off their lows.

Now, maybe there will be a recession next year. Maybe it’s going to be worse than 2008, and maybe QQQ is only going up because of the idea that interest rates will start coming down in 2024. I don’t know for certain, but it is important to be able to distinguish between the economic cycle and the stock market cycle to be better prepared for what may be on the horizon.

But let me ask you this. What did the chart of the QQQ look like in 2007 and 2008 compared to now? Let’s take a look.

The loss occurred before the recession and at the end of 2007 – early 2008, the tech sector hit a double bottom and helped lead the charge into better territory.

Now, again, let’s look at the weekly chart of the current-day QQQ. Doesn’t it look similar to a double bottom before getting ready to lead the market higher?

We have some way to go – let’s not get ahead of ourselves, but let’s also remain positive. Better times will be here again, and it could be sooner than you might think.

My stock pick of the day is Mondelez International (MDLZ). I have to admit that I don’t know much about them, but I do know that over the last 21 years, they have had a 90% success rate of rising by about 3% over the next five-week period.

I’m projecting a close of around $71.60 over the next 13 weeks.

A 16-JUN 67.50 call is roughly $2.70 at the time I’m writing this. If MDLZ rises to 71.60 by the 16-JUN expiration, the option would give you a $142 profit.

Better yet, a debit spread of the 16-JUN 67.50 / 72.50 would cost you about 2.00 and give you a potential profit of $208 per spread.

I hope everyone has a happy and safe weekend! Hope to see you here next week!

If you have any questions, comments, or anything we can help with, reach us at any time.
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Jeff Wood

Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab

Any trade or trade idea discussed is for educational purposes only.  They will not be tracked as an official trade recommendation. 

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