The NABE Forecast is Bad for US Stocks | Forex Technicals

Follow us:

Twitter

RSS

Facebook

The NABE Forecast is Bad for US Stocks

The National Association of Business Economists released today that 48 of 50 surveyed economists believe that the U.S. economy is currently in recession and that 2009 GDP is likely to come in at .7%. That is pretty low and, if accurate, could indicate that times are still going to be rough economically in the US through the next year. forecasting

The NABE has not been traditionally very accurate in their forecasts. In fact, if you used the prior GDP number as your "best guess" for GDP in the subsequent quarter, you would outperform the NABE estimates. That throws the estimates into doubt. It is one more example for why there is more value in looking at the market indicators today rather than forecasts about tomorrow.

Most of the economists surveyed also pointed to the currency credit crisis as a primary cause of problems in the US. In light of that "revelation" I wondered what we might use to determine when the credit crisis has abated. Are there indicators that we could use as retail traders for to tell when things are getting back to normal so we can change our strategies.

In today's video I will propose that the relative performance between the yield and price performance of low quality (junk) debt and high quality commercial debt could be a good real time indicator for how severe the credit crisis on any given day. That information is readily available to any trader though bond ETFs like HYG and LQD. You can see a chart of HYG with a comparative relative strength indicator for LQD applied to it in the chart below.

If you need some help understanding how relative performance or relative strength works, click here.

HYG - iShares High Yield Bond Strategy
hyg

If traders begin moving towards higher risk debt for higher yields then we know that risk has begun to change. That means traders will need to shift strategies as well. Until that time, the current trends should stay in play and investors in a strong USD, short equities and long JPY positions are likely to benefit.