The Great Recession Is Definitely Over! Where To Now?

I am certain the Great Recession is now over.

Nobody else has come out and said it yet. But it’s true…

I’ve laid out the recovery “Script” many times in the last few months, both in DailyWealth and in my newsletter True Wealth. A long sequence of events had to happen to get us out of this… in roughly the order below. It all happened - quickly:

Corporate bonds bottomed. Then copper. Then stocks bottomed in March.

Consumer confidence hit an all-time low in February at 25.3. It soared recently - hitting 54.9 in May. That’s an impressive recovery!

The same thing happened with my best end-of-recession indicator… the ratio of Coincident Indicators to Lagging Indicators (CILI), put out by the Conference Board. When it bottoms, the recession is over.

The CILI ratio bottomed in February and March at 89.5. The latest numbers came out last week. The bottom that was hit back then has held.

Remember, bottoms in consumer confidence and this CILI ratio typically come at the very end of the recession. These bottoms both happened months ago… This recession is over - it ended a month ago (and I said so, before anyone else, right here).

So the recession is over… Do we have smooth sailing ahead? Should stock prices soar?

Not so fast…

Remember, to make the big money, you have to buy stocks when things look bad… You have to buy in a recession.

In the True Wealth issue that came out just one week after the March 9 stock-market bottom, I wrote, “I believe the entire stock market could rise by 50% from its lows last week in the next 18 months.”

When I wrote that, it seemed foolishly optimistic. Consumer confidence was at record lows. The stock market was in a death spiral. Companies couldn’t refinance their debts… so they were selling assets at fire-sale prices. Things looked just terrible.

But that’s when you have to buy. That’s when you get the great bargains. So we stepped in and started speculating. Trough to peak, the stock market rose 40% in three months.

Today, things feel almost normal again. The stock market feels safe. You DON’T want to buy stocks when things feel safe - after the market is up 40% trough-to-peak in three months.

Now, I expect the market will waffle back and forth between two competing thoughts from investors…

“I’m feeling bold, and I want to take a risk.” (Everything goes up but the dollar and Treasury bonds.)

“I’m scared, and I don’t want any risk.” (Everything falls except the dollar and Treasury bonds.)

Which will win for the rest of this year? We can’t know. In March, it was obvious we hit an extreme of negative sentiment. That was a time to buy. But now? It’s not so clear-cut.

Sentiment trades are usually only good for about three months… The sentiment trade off the March 9 bottom ended June 9. So the market could fall from here. But it usually continues to rally six months after the end of a recession. So we could have another six months of a good market.

Since we can’t know, the best plan is to diligently track your trailing stops, particularly on speculative investments.

We’re staying in the game with stocks. The Great Recession is over and we want to be along for the ride. But we’ve got a finger on the eject button through our trailing stops.

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