One of the reasons I remain so negative on this market is that, more than seven years after the last U.S. recession began, there are several factors indicating that a potential recessionary slump could be imminent.
Tax receipts for the United States compared to gross domestic product (GDP) are above 18%, which historically has always preceded a recession.
Commodities are telegraphing additional worry, as lumber prices are in a downtrend, which is another indication of a recession. This is in addition to collapsing copper prices, another recessionary precursor.
Finally, Japan has officially entered another recession and, of course, emerging markets remain in bad shape, as I’ve been relaying to you for many weeks.
Those are the three main concerns I have, but, when you couple them with the fact that retailers have very high inventory levels and many stocks are down significantly with just a narrow group of equities that are showing any real strength, it all tells me that we are due for a recession. And, not to belabor the point, but a recession also means a down market.
I think the real danger, however, is that the Fed has expanded the money supply by 400% as a result of its easy monetary policies, and that’s going to eventually impact us, possibly resulting in a depression.
It’s distressing to note that the dollar is not worth a dollar anymore, rather its value is closer to about a quarter. But because it is the strongest economy in the world, investors continue to focus on the U.S, which keeps the dollar buoyant — for now, anyway. We’re in the middle of a currency war, which nearly always end badly.
I don’t mean to bring doom and gloom. It’s worth noting that we often see market strength immediately before a stock-market holiday, and the U.S. averages are closed next Thursday and will close early next Friday to observe the American Thanksgiving.
It’s possible, too, that we’ll see a typical “Santa Claus” rally in the final weeks of the year, but my expectation outside of temporary seasonal strength is that we won’t get much in the way of meaningful gains from here. I’ll continue to build in portfolio insurance and bearish positions while remaining extremely selective on bullish plays.
Given the pickle that retailers are facing with high inventories and recession threats, I recommend a bearish play on a high-end name, Nordstrom (JWN).
Buy the JWN Jan 52.65 Puts at $1.35 or lower. After entry, take profits if the stock price hits $51.60 or the option price hits $3.00. Exit if the stock price closes above $57.60.
A quick look at the United States Steel (X) puts I recommend last week. X is down nearly 3.5% today as I write, so we should see this trade start to work out soon. My outlook for commodities in general is bearish.
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