Friday, April 11, 2008

Economising on Research

Economists are cool: Royal Bank’s chief economist has just published an analysis about the possibility of a recession this year.

I am always fascinated by the detail in economic forecasts. Economists REALLY know a lot!
At CastelMoore; we know one or two critical things. #1: The most important bottoms in stock markets occur in recessions. #2: The most important tops occur in economic booms before recessions.

As a technical analyst, for me, today’s most important question is: was the January 2008 stock market selling climax THE low… or is the REAL low yet to come? The RBC economist believes there is no recession in the US – just a ‘soft landing’. Federal Reserve Board Chairman Bernanke seems more sceptical. But both economists are looking for economic strength in the second half of this year. If we believe the RBC report, we would be bullish on the stock market for fundamental/economic reasons. If we believe our own research, we are bullish for technical reasons as well. Either way, our method is working… our clients are currently invested in the stock market. And we will ‘know when to sell,’ when the time comes.

This is where the surprise could come. What if economic weakness in the second quarter is even weaker than they think? [Note: the second quarter is right now!] What if the “soft landing” is not so soft? Will unexpected economic weakness be the surprise news that triggers the next wave of stock market selling? And, more importantly, will the REAL stock market low occur later in the year?

This is where our technical studies help. Technicians don’t have to wait for economic data to be released before we can come to our conclusions. Our technical data is coincident – not lagged, like economic data. We can receive technical a “buy signal” [like the one we got in late January], long before economists have received their economic data. We find that our technical work leads the stock market – and, we all know the stock market leads the economy.
Technical analysis and economic analysis should be used hand-in-hand in the investment business. Technicals lead – economics confirm.

“Buy, hold and know when to sell.”