How to Trade the "Recession"

Goldman and CSFB are calling for negative GDP growth in Q2 and Q3. It is no wonder that the Fed is planning to cut rates “aggressively”. I realize that some of you have your own measures and indicators of a recession, such as how many plasma TVs were bought from Best Buy last quarter, or the aggregate tonnage of chicken wings consumed at BWLD stores during the college football season. But let’s just assume for a moment that the “asshats” at Goldman know what they are talking about.

How would you trade with this information?

First of all, we must make a distinction between “the market” and “a recession”. The two are linked, but not synchronized. By that I mean, they are not concurrent. The market is a forecaster of the economy. Sort of like The Fly’s time machine, only with solid gold wheels and loaded with ridiculously more coin. That’s why “the market” is categorized as a “leading economic indicator”. Leading economic indicators are indicators which change before the economy changes. Stock market returns are a leading indicator, because the stock market usually begins to decline before the economy declines and it improves before the economy begins to pull out of a recession. Leading economic indicators are the most important type for investors as they help predict what the economy will be like in the future. Ok, enough of Econ 101. You get the point.

So, let’s get back to the original premise. If we have negative GDP growth for Q2 and Q3 of this year, viz. “a recession”, how would you want to trade, based on that assumption?

Convention says that the market forecasts six to nine months in advance. If you subscribe to that, then you would look for a bottoming process in the market sometime between now and March. The low zone of 11,600 - 11,650 on the DJIA now appears to represent an intermediate term support and a stop loss point for the market. Since it was tested the past two days this week, it appears that it may hold for a while. Keep in mind the time factor here. If the market doesn’t make any kind of decisive move up, or drifts sideways here in the next 1 -2 weeks, I think the chances for another downturn increase.

We have dropped about 2,600 points from the October peak on the DJIA, so a 50% retracement puts us back in the 12,800 - 13,000 levels. There is heavy overhead resistance there in terms of previous price and volume activity. This may be where we are headed before the market may turn down again. Financials, retailers and homies should be good for a trade here, especially with Chopper Ben and crew determined to cut rates aggressively. I am now hearing from my bond trading sources that Fed Funds are going below 2.00% by mid-summer. Maybe BS, maybe not.
However, I would still look for a leg down again to test 11,600. Once we see a double bottom there, I would start to look at buying healthcare and tech stocks. I still like the Ag stocks here, especially MOS and POT, since I think they are fairly recession-proof and will continue to trend up regardless of the timing of a “recession”.

As always, take this with a grain of salt and do your DD.