The Sensitive Sectors

"The most volatile part of the American economy has slowed significantly in the last nine months, providing a warning of both recession and lower stock prices"

So writes Floyd Norris in today’s NYT, A Slowdown in a Sensitive Sector May Bode Ill for Stocks, or Worse

Norris calls these three elements "the sensitive sector" and noted
they have, in the past, provided an early warning of recession and
lower stock prices:

"Over time, a good indicator of
both the economy and the stock market has been the relative performance
of the [these sectors versus the broader] economy over nine-month
periods. Most of the time, the sensitive sector does better. But when
that sector turns in poorer performance after a sustained period of
outperformance, it is a warning. And that is what has happened. Over
the nine months through June, the sensitive sector grew at an annual
rate of 2.1 percent, while the rest grew at a rate of 3.7 percent.

The graphic below accompanied his article: It is a depiction of growth in three sectors that can be considered
amongst the most sensitive to economic changes and to interest rates:
consumer purchases of durable goods, residential construction spending,
and business investment in equipment.


Click for larger graphic


Graphic courtesy of NYT

The first question any skeptic should ask is, how reliable a tell is this under-performance been in the past?

The indiciator is bvetter at foreshadowing a slowdown rather than an outright recession, where its record has been mixed:  This is the ninth reversal since 1954. There was no
early recession after reversals in 1955, 1964, 1978 or 1987. Recessions did follow after reversals in 1959, 1969, 1973 and
2000. In all eight of the cases, they did foreshadow a substantial slowing of the overall economy.

But the most significant tell applies to Stock prices:

"Moreover, anyone who got out of the stock market when a reversal happened seldom regretted it. There were some gains, but they were generally small. And selling at the time of the reversals would have gotten investors out before the major bear market of 1974-75, the 1987 stock market crash and the worst part of the stock market decline from 2000 to 2002. Over all, the average performance of the Standard & Poor’s 500-stock index in the 12 months after a reversal is a negative 5.7 percent."

That’s a signal worth paying attention to . . .


A Slowdown in a Sensitive Sector May Bode Ill for Stocks, or Worse
NYTimes,  August 5, 2006

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  1. whipsaw commented on Aug 5

    hmm, BR posts article on Saturday morn, 8 hrs later there are no comments and it doesn’t look like any comments have been added to other articles. So this is a test to see if typepad really sucks and is down again or what? We’ll see soon enough.

  2. whipsaw commented on Aug 5

    I’ll be damned, typepad is not broken again, I stand corrected.

  3. phil commented on Aug 5

    any suggestions on which sectors will fare well when the shiite hits the fan? consumer staples, metals, healthcare??? or should i stick to cash and playing the short side

  4. whipsaw commented on Aug 5

    I don’t think that any sector actually makes money in a falling market, some just lose less than others. Energy can run in the opposite direction for a while and I did buy some January XLE calls this week in the belief that we will be treated to a big spike in oil and natural gas before the end of the year, but that’s purely speculative. Gold is its own market and may very well run up for a while too, but it seems to me that the miner stocks are more trouble than they are worth.

    The only thing that looks like a dead bang cinch is playing against the dollar. Whether there is a Pause! this month or next, it’s going to be sacrificed (again) and should experience an 8-10% drop over the next 6 months. Bonds look like they are also going to rally mainly because it appears that we are buying our own bonds to keep yields down, but that can’t last very long and Asian selling pressure will increase as demand for Asian products drops (i.e., the mercantilist policies of China, Japan and Korea will dictate that they stop buying our debt as we quit buying their products).

    At least until rate cuts begin (maybe December), it probably makes more sense to buy 90 day CDs that are paying nice interest rates than to try to go long and hope that you get it right.

  5. m3 commented on Aug 5

    “The indicator is better at foreshadowing a slowdown rather than an outright recession, where its record has been mixed: This is the ninth reversal since 1954. There was no early recession after reversals in 1955, 1964, 1978 or 1987.”

    but how many of these coincided with an inverted yield curve?

    the basic premise of the theory makes sense; it’s basically a modified dow theory. in conjuction with other indicators, it could be very indicative of future results…

  6. oldprof commented on Aug 6

    It is interesting that Barry (and many others) maintain that the market is full of glassy-eyed optimists who are bullish, yet simultaneously site declining markets and sectors and predicting recession. What has been discounted? What is the real contrarian position?

  7. oldprof commented on Aug 6

    hmm. should have previewed — make that ‘cite’ :)

  8. garylammert commented on Aug 6

    Is it possible that the macroeconomy operates according to near ideal noncomplex mathematical laws? Would this really be so surprising? Mightnít one expect natural laws as part and integral to a very nonrandom process that is ultimately quantified in the integers 0 through 9?

    The alcove of the Economic Fractalist has posed such a hypothesis – that the global macroeconomy with its integrative money growth, money growth cresting, and ultimately money decline, that is, its credit cycle, is exactly represented by simple quantum fractal growth and decline natural laws directly reflected in the daily and weekly and yearly trading valuations of its great composite equity, bond, and commodity markets. In a prospective fashion a mathematical x/2.5x/2.5x discontinuous fractal growth has been identified that appears to represent the limits of the global credit cycle system.

    While the integrative process is a complex mixture of facilitated debt and money creation, resultant asset and commodity inflation, ultimately limited by ongoing wages, consumption saturation, and increasing debt obligations via accelerating debt instruments, e.g., ARMS -the predictable evolution of the summation quantum simple patterns strongly appear to herald major directional changes.

    Such a change occurred for the Wilshire 5000, the composite US equity proxy marker, on 5 May 2006. That day represented the secondary closing high for the Wilshire after its a 142 year credit growth cycle from its predecessor stock summation proxy indicators starting in 1858 and ending in March of 2000. 5 May 2006, the secondary high to March 2000, was marked by a minutely exhaustion gap with a closing high for the last 6 years.

    Now on 4 August 2006, another possible minutely high exhaustion gap high has occurred accompanied by a very curious sequential exhaustion gap to the low side – covering the same trading valuation territory ñ all within the same day.

    The x/2.5x/2.5x extended fractal evolution from the Wilshireís lows in 2002 and 2003 to its 5 May 2006 closing high has been well described in the serial posting of EF. From the October 2005 low, the daily fractal pattern has been:

    x/2.5x/2x/1.5x or 12/30/24/18 days.

    Day 18 initiated a new fractal sequence with a 21-22 day base.:

    21/53/53 or x/2.5x/2.5x with day 53 of the third fractal growth sequence 4 August 2006.

    Interestingly day 42 – exactly 2X of the 21 day base – of the second fractal growth sequence was 5 May 2006.

    Was 4 August 2006 the final x/2.5x/2.5x extended lower high representing the second shoulder of the 5 May 2006 second shoulder to the March 2000 high?

    The US ten-year note has ominously inverted below the 3-month treasury for the last two trading days. Ten-year treasuries at near 5 percent in a massive deflationary environment would seem the prudent investment – and expected natural money flow move.

    As always expect the discontinuous and the nonlinear the unexpected. Lammert

  9. Mark commented on Aug 6

    Professor Irwin Corey said much the same, only clearer.

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