The Well-Informed Trader: Bear Markets
There are several leading indicators published and readily availabe online that are helpful in predicting the direction of the general market. The six I check are New Housing Starts (diverse materials consumptions and affected by interest rate increases), Auto Sales (other types of materials consumption and reflects general population's perception of economic strength), Steel, Chemical and Oil Production (more production = industrial growth), Business Loans (companies borrowing for capital expansion), Production Capacity (higher the better, up to 85%, beyond that indicates inflationary pressures) and Discount Rate and Fed Rate (higher rates attempt to slow economy and reduce inflation).
Right now we have a mixed bag of indicators. Housing and Auto Sales indicators are up, Steel/Chem/Oil and Production Capacity and Fed Rate are level, with Business Loans dropping. End of year and the short December production mont are inflating the Production Capacity number though, so I would rank them as downtrending. Employment is generally listed as a leading indicator, but in actuality it trails these.
Bear markets lead to a recession. If you note the change in indicators on a monthly basis, you can form your own opinion of where the market is going that won't be clouded by daily market swings. If one thinks we are approaching a strong down market, the next question is where to put your funds other than in cash. In all 7 of the last recessions, Drug, Food and Household Product companies outperformed the S&P 500. Logically, people didn't stop eating, taking medication or cleaning clothes, dishes or themselves. Not surprisingly, the Brewers faired better in 6 of the last 7 recessions. Large NY Financial firms faired well also. Tech stocks performed the worst.
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