A number of experts believe the US is close to a recession if not already in one...but they're having a hard time explaining the technical strength of the market, which often peaks or bottoms well before the economy turns. MoneyShow's Tom Aspray reviews the market here to see which sectors and plays might leave the skeptics behind in coming months.
The market got a nice surprise Friday, as after revisions the unemployment rate dropped below 8% for the first time in three years. The market acted well all week, and by Wednesday's close, the technical action suggested that the correction was over.
Even though the close was mixed-most of the averages closed Friday well below the day's highs-the overall action was constructive.
The decline from the September 14 highs has some nice similarities to the decline from the August 21 highs to the early September lows. In August, the correction lasted 12 trading days, while through Wednesday it had been 14 days since the December S&P 500 E-mini futures had seen their high of 1,468.
If the futures have a an equal rally from last week's lows (67 points), the upside target would be 1,491. This would catch quite a few of the pros by surprise, as many argue that with the Spyder Trust (SPY) already up 16.8% for the year, a 19% gain with this economy would be too much.
Many economists would be even more shocked, as some think we are already in a recession. The debate about the relationship of the stock market to the economy has gone on for many years, and many think that the current stock market strength is an aberration.
The popular belief is that stock prices top out around six months before the start of a recession. Therefore, many can't believe that the current strength in stock prices is forecasting a better economy in the next six months.
Since the market is dominated by professionals and not the public, the skeptics argue that the strength of the stock market can't be trusted. For the investing public, there are many recent events that make this view easy to accept.
The 1973-1975 recessions started in November 1973, but the Dow Industrials topped in March 1973 at 1,067. By the end of November, the index had already lost 23%. By the time the market bottomed in December, it was down over 46%.
Many technical analysts warned that the market was topping well before there were any clear signs of a recession. They were in the minority, as technical analysts in those days had about the same standing as fortune tellers.
Though I was not involved in the market during 1973-1975, I did examine this period closely early in my career, and it convinced me by the early 1980s that technical analysis was the best approach.
NEXT: Applying Technical Analysis to Today's Market