David Taggart Thursday, August 12, 2010 9:33 AM Email Article Bookmark: TwitterDeliciousDiggYahoo BuzzFacebookStumbleuponLinked InMy SpaceNewsvine Font Size Print Article 70% and climbing - Get your Free Trial Today! Article Author Bio and Articles Author's Website Vote for next session The next market session will close: While we have been long various risk assets over the past several months we have been very cautious and have had some short positions the entire time. We have been very defensive due to the plethora of indicators pointing to an economy that at best was going nowhere for the majority of 2010. The reality is that as time has gone on we have seen more and more indicators deteriorate showing that money for the real economy is tight, employment is worsening, risk assets are overpriced, demand is not there, etc. This basic outlook has served us well as our newsletter model portfolio has generated positive returns with very low drawdowns so far this year. Here are two indicators that show that their is a very high likelihood that we are headed for not just a slowdown but a recession. The two indicators are the PMI and the ECRI WLI growth rate. As much as the ECRI has been trying to say that they aren't calling for a recession we and several other analysts find a lot of use in looking at it. We think that the main reason for some of this controversy is that the folks at ECRI think that Hussman and Rosenberg are using it as a mechanical model and that if it does X then Y will happen. Instead we are confident that most analysts look at it as another tool in the toolbox. Like inflation, interest rates, industrial production, etc. it is but a piece in the puzzle. At least that is how we use it. Looking at the ECRI WLI growth rate and the PMI on the same chart you can see that the WLI tends to lead the PMI by roughly three months. Not only does it tend to lead but with a few exceptions it does a pretty good job of showing the magnitude of the future move of the PMI. Looking at the chart right now it appears as though the PMI is headed to a level below 50 and we would not be surprised to see it down to 40. These levels tend to be not just slowdowns but recessionary.
