By Anton Vrba and Georg Vrba, P.E.
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There is no bell ringing when the market peaks before recessions, but indicators such as iMarketSignals' Business Cycle Index (BCI) are useful in identifying recession starts well in advance. By exiting the stock market at the time of BCI's recession signals, investors would still have avoided about 60% of the market declines from pre-recession peaks to inter-recession troughs on average.
The BCI, its growth BCIg, signal dates and the S&P500 are shown in Figure 1.
In Table 1 below we record for each recession the pre-recession peak of the S&P500, the value on the day of the BCIg signal, and the subsequent lowest value of the inter-recession trough. From these we calculate the loss avoided by exiting the market on the day of the BCIg signal.
Following the signals from our recession indicator one would have avoided on average about 61% of the total market decline from pre-recession peaks to inter-recession troughs as indicated in the last column of Table 1. One can see in column 6 that exiting the market at the signal dates would have avoided losses averaging about 26%. Had one known the market peak, one could have avoided the 34% average decline as shown in column 5. Prior to the last recession the exit signal from BCIg occurred almost when the market peaked.
The BCI was developed for reliable recession prediction, thus re-entry signals into the market are provided by other models.
Anton Vrba is an electrical engineer. He pursued a career in R&D, manufacturing and construction project management. His interests are mathematics and physics. He is a lateral thinker and has ideas that challenge the established explanations to the workings of the universe, which he is in the process of publishing on his website.
Georg Vrba is a professional engineer who has been a consulting engineer for many years. In his opinion, mathematical models provide better guidance to market direction than financial "experts." He has developed financial models for the stock market, the bond market, yield curve, gold, silver and recession prediction, all published in Advisor Perspectives. The models are updated weekly at http://imarketsignals.com/.