Monday, August 27, 2018

Keystone's Recession Indicator; Philadelphia Fed Mfg Index Prints 4 Consecutive Down Numbers and/or 3-Month MA Crosses Below Zero

The recent manufacturing data is soggy and today was no different with the Dallas and Chicago Fed data. The numbers remain strong but are running out of gas. For the Philly Fed, four consecutive downward-trending numbers and/or the 3-month or 4-month moving average falling below zero are useful in determining when a recession arrives.

The Philly Fed last week is at 11.9 which is the blue line in the chart the lowest number since 2016 but remains above zero. One rule of thumb Keystone uses on recession forecasting is that if four decreasing numbers occur in a row, a recession is likely on the come. The last four readings are 34.4, 19.9, 25.7 and 11.9 so this is not occurring as yet. Watch the number on 9/20/18 to see if it is below 11.9 and then the key will be if another lower low occurs or even a negative number in October.

Another rule of thumb for the recession watch is using the 3-month MA, or the 4-month MA, for the Philly Fed data. This is shown by the maroon line that prints a lower lower than in recent months. When the moving average turns negative a recession is likely beginning to smack you in the face. The chart is for the last 18 months from March 2017 through August 2018.

Note the trend in the Philly Fed since the peak at 34.4 in May; lower lows and lower highs. When the Philly Fed falls apart it is usually a very fast and sharp drop (which is not occurring as yet). Everyone is busy celebrating the stock market euphoria and most young folks (under 30 years old) have not experienced a recession before. All of the lives of young people will change forever when the recession hits. Many will lose their jobs and have no idea what will hit them. Old dudes, like Keystone, have lived through several recession periods over the decades.

When the 3 or 4-month MA's turn negative, the recession has begun or will within a few short months. The maroon line is at 19.2 heading lower. Typically, a recession occurs every four to seven years but the Federal Reserve and other global central bankers have destroyed the expected business and economic cycles with their obscene Keynesian spending since March 2009. That is when former Fed Chairman Bernanke, the "Father of Easy Money," began QE1 to protect the wealthy privileged class in America saving the stock market. Anything goes in markets nowadays and the bitter end to a decade of central banker largess, that creates the nonstop record highs year after year, may end more abruptly than anyone realizes.

There was a bad recession in the early 1980's, then a milder recession in the early 1990's. The 1990's were aided by the huge technology boom and the advent and common use of the personal computer. This pushed off the recession until the dotcom bubble burst in March 2000. In the early 2000's, former Fed Chairman Greenspan pumped the stock market higher to reward his wealthy friends by lowering rates and keeping rates at low levels. This created the housing boom which went bust in 2007-2008 and created the 2008-2009 financial crisis. Fed Chairs Bernanke, Yellen and now Powell keep the stock market party going off the 2009 bottom to the present day.

The stock market peaked in 1980 dropping into the recession during 1980-1983. The stock market peaked in the summer of 1990 as the recession began and was in progress. The Philly Fed 3-mth MA went negative months before. Stocks peaked in March 2000 with the recession during 2001-2002. The 3-mth MA crossed negative at the start of 2001. October 2007 was the peak in the stock market ahead of the Great Recession during 2008-2009. The Philly Fed 3-mth MA crossed negative in mid to late 2008.

In 2011-2012, the 3-mth MA went negative but Bernake saved the day when he announced 'QE Infinity' again saving the wealthy class that own large stock portfolios. In late 2015, the Philly Fed 3-mth MA again slips negative. The stock market peaked in May 2015; you long time followers of Keystone remember him calling the exact top in the stock market back then. However, as always, the Fed and other global central bankers stepped in to save the day in early 2016 (the Tweezer Bottom on the candlestick charts) and stocks rally to the present day.

The stock market typically peaks ahead of when the Philly Fed 3-mth MA slips negative which occurs coincidentally or a couple-few months ahead of when recession begins. The Philly Fed number is approaching zero quickly and the 3-mth MA is under 20 printing new lows and heading down. Remember, when the Philly Fed collapses, it typically occurs very sharp and quick. The recession is likely approaching far faster than anyone realizes.

Go back and look at the SPX monthly chart previously posted that is in universal negative divergence forecasting a top in the stock market currently. The caveat is the MACD line that remains neggie d but you have to watch that closely since if the MACD prints a higher high than January this will extend the stock market top a couple-three months. Currently, however, it is very likely the stock market is topping right now (a multi-month and multi-year major top) between here and the end of year.

The stock market top would gel with weaker numbers ahead for the Philly Fed and take the 3-mth MA negative as we end the year and in early 2019 so the recession may be on the come in Q4 or Q1 2019, or at the latest Q2 2019. Now many analysts will say this is preposterous, and maybe they will be proven correct, but if you are called into the boss's office during the holidays or as the new year begins and he drop-kicks you across the parking lot as the recession is underway and stocks and the economy are heading south rapidly, you will only have yourself to blame for not being prepared. The vast majority of Wall Street analysts say a recession will not occur until late 2019 at the very earliest and most say a recession is a 2020 event at the earliest.

Watch the Philly Fed closely here on out; see if four downward numbers will print consecutively and monitor if the 3-month MA turns negative. Keystone can update the above chart as time progresses if the hundreds of thousands of monthly users of the KE Stone blogs provide support, otherwise, you will be on your own (but Keystone will be happy to tell you what you missed out on after the fact). This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.

Note: Keystone found an article that is well written by Jill Mislinski at Advisor Perspectives that is useful for further study concerning the Philadelphia Fed Mfg Index. The link is Advisor Perspectives Philly Fed Manufacturing Index.

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