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What to expect from the markets in a recession?

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  • History shows that a recession is a necessary downturn to make the markets pliable for new highs
  • The last three recessions occurred in the new millennium
  • Historically, recessions last an average of 17 months

The big R word is just around the corner. A recession is defined as two consecutive quarters of declining gross domestic product (GDP). By this definition, we are in recession based on a GDP decline in the first quarter of 2022 of (-1.6%) and a decline in GDP in the second quarter of (-0.9%). Worth checking out the previous one recessions in the age of electronic commerce to alleviate some of the fear of the unknown. Every recession in the history of the US stock market has resulted in a higher market. History shows that a recession is a necessary downturn to make the markets pliable for new highs. Please note that this only applies to the benchmark indices such as the S&P 500 (NYSEARCA: SPY) and not for each individual share. This is because the benchmark indices regularly swap underperforming stocks to keep them afloat and rising over the long term. Each recession has led to the creation of more bagholders who believed the hype and took their positions all the way down. Not every stock survives a recession or a bear market, only the indices are destined to rise again. Historically, recessions last an average of 17 months. Stock markets also tend to rise before the end of each recession. Investors looking for individual stocks may want to consider taking some of the highest-weighted components in the S&P 500, such as the top three, including Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT)and Amazon (NASDAQ: AMZN) as these stocks tend to lead the index moves on the way up (and down).



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What to expect from the markets in a recession?

History of three recent recessions

The last three recessions occurred in the new millennium. The recession of the early 2000s occurred during the internet bubble and subsequent bear market while the S&P 500 (NYSEARCA:SPY) fell (-26.3%) from its high of $155.75 to round out the loss at (-8.2%). The SPY continued for the next 11 months, reaching the low of $77.07 in October 2002. The SPY managed to return to the previous highs of $155.75 during the housing bubble by June 2007. Unfortunately, in December 2007, the SPY plunged into the next recession. The Great Recession saw the financial meltdown lead to a sell off (-55.47%) to $67.10 from the SPY’s high of $155.75 to close (-37.56%) during the period of 16 months ended June 2009. The markets managed to recover as the SPY breached its previous high and double topped $155.75 in March 2013 and continue to reach all-time highs of $332.95 in January 2020 at the start of the COVID-19 pandemic that caused the most recent recession. The COVID-19 recession lasted for two months as the SPY fell (-33.9%) to a low of $218.26 before bouncing to wrap up a (-10%) drop in April 2020. The markets would launch a catapult rally that again broke through the highs of $332.95 in August 2020 and continue to climb to new all-time highs of $479.98 in January 2022 before falling back into the current recession of 2022. The SPY peaked at $479.98 in January 2022 and fell (-24.5%) to a low of $362.17 in June 2022 before rallying in August. For the last three recessions, the SPY has fallen (-26.3%), (-55.47%) and (-33.9%) from its highest to lowest point. This current recession has led to a drop (-24.5%) from high to low, assuming the lows are sustained.

Using Rifle Charts to Discover the End of the Recession

Using the gun cards on a monthly basis, we can see that each recession recovery was preceded by the stochastic cross-backup, a rising 5-period moving average (MA) support, and a monthly market structure layer (MSL) buy tractor. The 2001 recovery kicked off on a 25-band cross-up. The 2009 recovery started with a 20 band cross-up. The 2020 recovery kicked off on a 70-band cross-up. While a low band through or outside the 20 band is preferred, the COVID-19 recovery is triggered at the 70 band cross-up. All three reversals occurred after monthly stochastics moved back up. Currently, monthly stochastics are still descending on the 40 band but have returned above the 5 monthly period MA at $405.53. The monthly MSL trigger is determined by the SPY’s highest price in August 2022. If the SPY can break the August highs while the 5-period MA support rises or crosses the 15-period MA and the stochastic crosses again go up, then we are out of the proverbial woods. This will take at least two months or two monthly candles to confirm, assuming the SPY does not break the swing low of $362.17. The market usually recovers before the end of the recession. However, it is certainly possible that markets will remain lower even after the recession, as evidenced by the recession of the early 2000s. The caveat was the unprecedented terrorist attack on the 911 World Trade Center that caused markets to sell lower. until the US launched the war in Afghanistan in 2002. The most recent two recessions saw the stock market fall first and then never look back.

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