Is the next recession imminent?

Joe Flaherty as Count Floyd 

 Scary stuff

Lately I've been reading some pretty alarming commentaries about how we're about to head into another recession.  The latest one,by Peter Brimelow, is titled Five down weeks stir crash whispers and just appeared today in Marketwatch.

You can read it here: http://www.marketwatch.com/story/five-down-weeks-stir-crash-whispers-2011-06-06?link=MW_story_popular.  It's the number one story on Marketwatch today.  Of couse, MW's readers seem to be eternally pessimistic, but this article really got me thinking.  Apparently, Richard Russell of Dow Theory fame, not normally known for his pessimism, goes so far as to say

"we could see the beginning of Great Depression No. 2.”

Whoa! As Count Floyd on Second City TV's Monster Chiller Horror Theater  used to say, "Scary stuff, eh kids?"

The Dow monthly chart

So I decided to take a look myself (at the charts, not SCTV). Here's a monthly chart of the Dow going back to late 2006. It completely encompasses the Great Recession and the follow-on rally bringing us to today.

 

The regression trend channels

I have drawn in two regression trend channels here.  Both have pretty high Pearson's coefficients, so they're pretty good.  The first documents the run-up in 2006-2007 to the peak in October 2007.  The second is the run-up from June 2010 to the April highs of this year.

Let's look at that first.  Last month the Dow touched the right-hand edge of the RTC.  That is a bearish setup.  Now admittedly this month's candle is not fully formed, so it's a bit early to draw any conclusions, but so far we are entirely beneath the lower RTC line.  That is a bearish trigger.

And does this work?  Well take a look at the 06-07 RTC.  We touched the lower line with a monthly doji candle in October 2007.  November closed below the line and then December fell entirely outside the line.  You don't need a magnifying glass to see what happened next.

The technical indicators

Now let's look at the indicators.  The line with the red and green boxes is the RSI.  Red means overbought.  Note how not only have we been overbought for some time now but the RSI has peaked and is going lower, just as it did in November 2007.  In fact, it's at the same level now as back then.

The next line down is momentum.  That has been running at overbought levels since March of last year.  Going into the October 2007, momentum had also been at very high levels for a long time.

The next line down is money flow. The current level is 84.95, which is even higher than the entire 06-07 rally, when it was in the 50's and 60's running up to the October peak.  But more importantly, it has started coming down.  Last month it was 87.4.  Now look back at money flow in 2007.  Once money flow starts decling, that is not good for the market.

Finally, check out the short stochastic on the bottom line.  This has been reading highly overbought all year.  But just now it's starting to turn downward.  That is always very very bearish.

Now going back to the candles, notice how after running up the upper Bollinger band for five months this year, we have now pealed away from that line.  The same thing happened in October 2007.

Oil

Now let's look at oil.  A couple of weeks ago, I was reading a newsletter put out by Colin Twiggs at incrediblecharts.com.  This one was called "Crude spike warns of trouble ahead."  His basic premise was that every time we get a spike in the price of oil and commodities, a recession is sure to follow.  He included a chart demonstrating the effect.  In fact, by the time these items have started coming back down, we're already in a recession.

Here's a daily chart of oil futures, the CL N1.  Notice the big dump it took early in May.  This was followed by an attempt at a retracement that ultimately failed, leaving us rangebound in the 96-102 area.  And the stochastic of this chart has also peaked and is now headed lower.  This is not a chart that looks like it's going higher any time soon.  Earlier this year, I thought we were going to go back to $140 like we did in 2008 before peaking.  Now I'm not so sure anymore.

Right now, we're looking at oil that peaked on May 2nd.  Last time around, oil peaked in July 2008.  By that point, the market had already peaked nine months earlier and had undergone a significant correction.  But worse, much worse was just around the corner as the Dow then crashed from 11,344 to 6470 in March 2009.

Politics

Have you seen the mini-series Band of Brothers?  Remember the part in Bastogne where Sgt. Compton tells Lt. Nixon, "I have every confidence in my men.  On the other hand, I have no confidence in our leader.  Lt. Dyke is an empty suit".  Well guess what, today in Washington we are being led by another empty suit, this time in the form of Emperor Nerobama, who is happily fiddling away while America burns $100 imported oil.

Obama seems far more interested in his own re-election than the good of the country.  That's unfortunate but also perhaps to be expected when you elect a product of the Chicago political machine to the White House.  The scary part is that he seems so clueless.  I have to hand it to Jim Cramer, who a couple of weeks ago called on Obama to raise oil futures margins.  That would take care of the speculators who are busy driving the last nail into our coffin while they make out like the bandits they are.

But there doesn't seem to be anyone home at 1600 Pennsylvania today.  "Yes we can" is now more like "yes we kick the can down the road".  Only the can is getting bigger and bigger and is about to start rolling backwards crushing everything in its path.

I'd pinned a lot of my expectations for 2011 on the pre-presidential election year phenomenon by which the party in power pumps up the market to ensure victory at the polls in the coming year.  Unfortunately, it looks like Obama isn't listening.  He's apparently not even paying attention and this is most worrisome.  This is causing me to question whether this might not be the year the pre-prez year phenomenon stays home.

So I am now going to go on record that while I still think we may have a short rally before the end of this week, my longer term outlook for the rest of 2011 is gloomy in the extreme.  We are certainly in for some significant additional downside from here.  Is it going to be another recession?  Maybe.  Is it going to be the Great Depression?  Probably not, but given all the gathering storm clouds, on the horizon I don't even think that's out of the question.

The bottom line

Right now I'm holding onto my low price/high yield portfolio.  It's about 1/3 of my trading account.  It should be fairly secure until interest rates start going up, and it sure doesn't look like that's on the table any time soon.  The other 2/3 of my account are 60% long, 40% cash.  I'm going to use any rallies coming up to liquidate long positions and I'm going to start looking seriously at good shorting opportunities. 

I am more pessimistic right now than at any time since I started trading back in 2003, with the exception of September 2008.  FWIW.  I could be wrong.  I hope I am.  But those monthly charts are haunting me in my sleep.  I don't like it, not one bit.