In the most recent issue of my premium trading service, Income Trader, I didn't make a trade recommendation.
Not a single one.
I'll admit, it's a little strange. I've rarely done this since beginning the newsletter more than six years ago.
It's not what my premium subscribers are used to. At all. They're used to getting at least one trade every week, along with a host of "bonus" trades sprinkled in throughout. Add that up over the years and, well, you get the idea. (And through it all, thanks to our system, we've been successful on over 90% of our trades.)
So why no trade last week? The problem in this market is safety.
Would you let yourself be injected with MiracleBlood?
It's earnings season, and by this past Friday less than 10% of the companies in the S&P 500 have delivered quarterly results. So far, some reports were better than expected while others were worse than expected. It's been almost random, and I want to see a trend in earnings and the reaction to earnings before jumping into this market. Sometimes it's best to step aside some weeks and let the data reveal its trend. The alternative would be accepting higher-than-average risks in pursuit of lower-than-average returns. I'm not willing to play that game, and you shouldn't be, either.
Instead, I'd like to share some economic data with you. I know this stuff can be a little boring sometimes, but I hope you'll keep reading because I think you'll find the points I'm about to share with you at least different than what anyone else is talking about. In fact, you might even think they're a little weird. But if you stick with me, you'll see where I'm going with all this...
Weird Indicator #1
Let's start with a report from the American Forest & Paper Association and the Fibre Box Association. Bloomberg headlined the story on this news, "Packaging Investors Just Saw $3 Billion Wiped Out in an Hour."
This is a relatively small industry, so that loss is significant, about 4.5% of the value of the group. An analyst at Canada's BMO sent an "urgent dispatch" to investors after the release of the data, noting:
'Markets have deteriorated rapidly' as box demand tumbled 3%, operating rates fell to 86.4% and exports slumped 19% y/y (containerboard and box shipments are a coincident indicator of trade momentum, and the latest data is quite simply a dire signal for global trade).
As BMO points out, even with big production cut, 'inventories fell less than the seasonal norm' and risk has increased that North American prices will follow sharp erosion in global prices.
Cardboard pricing was an incredibly reliable economic indicator in the past. The chart below shows the Producer Price Index for paperboard, another word for the material in cardboard boxes. This data lags the real time data distributed by the industry associations but has a long historic record and is useful for a historical perspective.
The data shows that from 1927 to 1980, year-over-year declines in price were almost always associated with recessions.
Source: The Federal Reserve
The indicator was associated with recessions but was not a reliable timing tool. Some declines came before the recession while others occurred after the recession began. Since 1980, price declines have coincided with recessions although there were a number of false signals.
Source: The Federal Reserve
By itself, the decline in cardboard box production is interesting and a potential warning of an economic slowdown. But the reason this story caught my eye was because of other less popular data that point to a potential recession. I'm going to highlight two more data series, starting with RV sales.
Weird Indicator #2
Recreational vehicle sales dropped 4.1% last year, according to the RV Industry Association. This was the first year-over-year decline since 2009. The chart below shows that annual declines in sales have been associated with bear markets since 1989.
Source: RV Industrial Association
I believe the relationship between RV sales and recessions or bear markets is more than a coincidence.
RV sales may be the ultimate measure of consumer optimism. They are expensive, often costing more than $100,000. But that's just the beginning of the expenses, since operations and maintenance of the RV can really add up. Owners might pay thousands of dollars to have maintenance done before a trip and then thousands more for fuel and travel expenses. RVs can even be expensive when they aren't being used. Many owners need to pay to store their vehicles since they don't have room at home for such large vehicles.
Taking on all that expense requires a high degree of optimism that a consumer's income will remain high enough to pay those extra bills. The decline in sales, I believe, shows a drop in the level of consumer confidence is building. The next data point I have confirms that outlook.
Weird Indicator #3
It's a chart of Mercedes-Benz sales in the United States. Sustained declines from 1987 to 1991 coincided with the October 1987 stock market crash and a recession. The next decline coincides with the 2008 recession. The third decline in the data started in 2018.
Source: Car Sales Base
Mercedes buyers might not be the most sympathetic group of consumers. It seems safe to assume that they have above-average incomes. And the data shows this demographic could be cutting back. That would be a bearish omen for the economy since high-income households do spend more than average.
So to sum things up, sales of cardboard boxes, RVs, and Mercedes declined. That's bearish because sales of each of those are associated with economic growth.
The fact that all three of these seemingly unrelated products are in downtrends is sending a potentially important message about the economy -- and many investors aren't listening to that message.
The truth is many economists are missing the same message because they are using traditional indicators like unemployment data and industrial production. Traditional indicators tend to miss economic turning points because they are prepared by economists who are extrapolating the recent data into the future.
Instead, I'll be relying on "weird" indicators like the ones discussed above. Market-based data is screaming at us to be careful, and I intend to be even more careful than I normally am. And that's why we didn't make a trade last week.
I'll also be relying on the award-winning ITV Indicator, which I developed myself, to identify our trades over at Income Trader. It's proven to be far more useful than the tools most traders rely on -- and far safer. That's how we've been able to successfully make winning trades more than 90% of the time -- and I don't intend on that changing any time soon.
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