May 3rd, 2022

That Pesky “R” Word

Technically speaking, a recession is measured as two consecutive quarters of declining GDP.  At least that’s how economist Julius Shiskin defined it in 1974 and it’s stuck ever since.  Did you know that Shiskin had more rules, but over the years the only one that stuck was dealing with GDP contraction?  Let’s take a look at some recent recessions.

The SP500 had a high in March of 2000, but all the way through July 2002 the GDP only showed a single quarter of contraction.  Fast forward to 2007 and there was a market high in October, but in May of 2008 websites were still asking if we were headed into a recession because the GDP contraction rule hadn’t been triggered yet.  

That brings us to today.  We had a high in January of 2022 and the talk of that pesky “R” word is back with the report that came out last week that the GDP contracted in the first quarter of 2022.  

While the official definition wouldn’t have us in a recession until the end of next quarter (assuming we have another contracting GDP quarter), one may ask, are we there already?

Let’s break down the numbers.

The data, reported Thursday by the Commerce Department, marks the worst three months for GDP since the pandemic hit in the second quarter of 2020. 

The drop-off in the first quarter was led by a surge in imports and imports count as a subtraction in the GDP calculation.  Americans were buying more goods from overseas, but remember how we’ve been talking about a backlog of goods at the ports?  It wasn’t that long ago the nightly news had a story each night with videos of the ports with ships waiting for weeks to unload their goods.  Several of those goods were not ultimately delivered until the first quarter of 2022, which is now skewing the numbers.

Demand for goods in the first quarter slowed partially as a result of the stockpile of goods that were finally delivered from the ports.  Meanwhile, corporate and consumer spending increased, as the job market remained hot.  Companies continue to spend on attracting and retaining top talent.  Higher wages have allowed workers to forget about inflationary pressures, which is why I think we’ll still see an uptick in summer travel.  

There’s more to this recession story though.  We’re going to get into the housing part of the equation tomorrow and the job market later this week.  We have a lot to process with the Fed meeting and jobless claims later this week.  We’ll keep talking about the “R” word and the types of tactics the folks at Traders Reserve will use to collect premium each week.  

What do you think? Are we in a technical recession?  Do you think the definition of a recession should be revised instead of waiting for two full quarters of GDP contraction?  

TRADE IDEA

With the large swing down over the last couple of days, volatility has spiked.  If we see a volatility crush after the Fed meeting, the cost of puts should decrease quickly.  We don’t know what reaction the market will have after the meeting, but we want to take advantage of heightened premiums in the options market, so an iron condor on the SP500 ETF (SPY) could work here.

Ticker: SPY

Current Price: $411

Expiration: June 17, 2022

Sell to open $444 call

Buy to open $452 call

Sell to open $378 put

Buy to open $370 put

Total credit: $3.03 or $303

Buying Power Reduction: $497

It’s a longer-dated iron condor, which may take longer to come into profits, but it also gives plenty of time to recover should it be tested on either side.  

If we see the market rally after the Fed meeting and then turn around and head back in its downward direction, we could find ourselves right back at this same price a couple of weeks from now, so let’s see if we can make time decay work in our favor here.

MARKETS

All eyes remain on the Fed meeting this week.  Analysts are predicting anywhere from a 0.25 – 0.75% increase in rates.  

Until the results are announced, I expect to see more selling and heightened volatility.

TRADING EDUCATION

Yesterday we covered the very basics of a point and figure chart.  A column of X’s indicates higher prices and a column of O’s indicates selling pressure.  

I said yesterday we were going to talk about using point and figure charts for market timing.  Enter the NYSE Bullish Percent Index ($BPNYA).  Note that most brokers don’t have this symbol since most brokers don’t have point and figure charts.  Stockcharts.com does track the symbol though.  

The $BPNYA is an oscillator of the number of NYSE stocks on a point and figure buy signal.  Since it measures the percentage of companies on a buy signal, it oscillates between 0 and 100.

This is what the $BPNYA looks like in point and figure form (although some view it in normal chart form too). 

Unlike other p&f charts, the numbers along the right represent a percentage, not a dollar amount.  Each box represents 2% of NYSE companies. 

This means currently there are only 38.16% of all NYSE companies that are on a point and figure buy signal.  If you look at the chart that goes back to 2019, we’ve only been below the 34% level in 2020 for covid and late 2018. 

Jeff
Editor, Wealthy Investor Society