Early US Recession Indicator Triggered.

Here is a belated update on the UK Monthly Market Timing indicators that regular readers will know I have been following for a while now, even though I'm not generally a fan of trying to time the market. I delayed reporting on these this month as flagged last month these remain substantially above their moving averages which are used as the trigger for a buy or sell decision. The other reason for the delay was because I wanted to wait for the latest US Unemployment data which was reported yesterday.

Before I get into the detail of that here's a brief summary for new readers and some links for further detail. First off the Market Timing Indicators (here's an early post with links to the research papers) are based on total return indices and these are compared to a 10 month simple moving average. The market is then seen as being in a bull trend and you should be buying / long when the index is above its moving average and you should consider selling / shorting or hedging at that stage.

The problem with this simple indicator is that it often gives false signals and can lead to whipsaws as the market can often dip before rallying to give rapid sell and buy signals within a short space of time. This is where the US Unemployment data comes in. I wrote about this earlier this year where another author at Philosophical Economics had used the US unemployment data and compared it to its 12 month moving average and used this as a recession indicator and as an additional trigger for bullish and bearish signals on the timing indicators (See link above). The bottom line was that by using this additional trigger this helped to eliminate most or all of the whipsaws / false signals and keeps one invested for much longer in a bull market and therefore improved the absolute and risk adjusted returns from the market timing strategy. It means you should ignore market sell signals when US Unemployment is below its moving average and only act on them when it is above as a recession is then likely or in progress.

Now comes the bad news as I have to inform you that the US Unemployment data yesterday somewhat surprisingly saw the headline rate tick up to 5% rather than down to 4.8% as some had expected, even though the Non Farm Payroll numbers themselves seemed OK. So assuming this upturn in the US Unemployment rate and break above the moving average is confirmed in coming months then we have had an early warning of a forthcoming US recession. I say early because this indicator does tend to be slightly early, around 3.5 months on average (as shown in the table below), but early is good in this case. While I also found the Chart  (from the Philosophical Economics post) quite compelling too.

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Summary & Conclusion
The UK Market Timing indicators remain in a bullish positioning with most of the main indices still being around 9% above their moving averages with only the Mid 250 again lagging with a 6% divergence. Thus these are still indicating bullish / invested, although as I observed last month these are looking quite extended compared to the averages. In addition the FTSE itself with its price index is flirting with its longer term All time highs around the 7000 level see chart below and it remains to be seen if we can break out from this 16 to 17 year trading range or if we will see a treble top and another plunge down in the not too distant future.

Meanwhile the equivalent timing data for US Equities and other asset classes also remain above trend & therefore on a buy (see here for an update on this from Doug Short). Meanwhile Unemployment data is flagging a US recession warning and as such, assuming it is confirmed in the months ahead and doesn't itself whipsaw, then the next time the UK and indeed US Market Indicators turn negative then we should probably be prepared to take the signal more seriously - consider yourself on notice - you have been warned and you read it here first.