The Retread Indicator

How likely is a recession in the near future?

Financial Market Perceptions of Recession Risk, by Thomas B. King, Andrew T. Levin, and Roberto Perli, 2007, provided several simple ways to determine that. Merely plug values into this formula and you have an answer:

But for those of you who don't regularly read Federal Reserve Board papers or have a PhD in Math, I'll offer some insights I've gained over the years.

One of the most interesting ways I've read on how to spot declining economic trends is the ‘retread indicator'. I read this many years ago, and don't remember the author's name to give credit. But it went like this. We've all seen ‘failed retreads' on the highways.

The theory goes that trucking companies are closely tied to economic activity. And when times are good, they can afford new tires. When margins become ‘pinched', they switch to buying retreaded tires, and retread tires have a habit of failing, discarding rubber carcasses along the major highways.

Make a note of the number of retread carcasses. Few carcasses indicate a stronger economy. Numerous sightings indicate lean times. Of course, technology and economics may have changed the usefulness of this indicator over time, but I still think of this theory every time I see retread road-kill.

In 1990 I was running a small company. I noticed phone and mail orders, previously strong, had suddenly tapered off in early 1990. In my regular trips to the printer, he began commenting about how business had slacked off. He told me the owner of the sandwich shop across the street had mentioned the same thing. My own recession indicator, the quantity of ‘Available space' signs in commercial buildings and small office parks, was suddenly jumping.

We now know that the 1990 recession was officially declared as starting around July of 1990. But many small businesspeople noticed something wrong a few months before. By the way, in 1990 I had noticed increased retread carcasses on the highways.

Ever since then I've kept a close eye on office park vacancy signs, comments from local business people, and for that matter, retreads on highways. I don't need a PhD in Math or a job at the Fed. I've found my indicators work very well.

The local landscape company owner has been reporting the best year in five years. Customers are once again asking for the slightly more expensive maintenance projects they have put off for years. However, they still aren't going for the more elaborate projects that were common in the 90's. The local auto-repair shop owner reports similar experiences. Customers had put off maintenance work and had been doing only necessary repairs. In recent months they have been spending more on their cars, but again, it is restrained.

The kitchen installation company that does primarily new-home projects reports a full book, with hundreds of kitchens to install over the next few months. They are doing quite well, as new-home building here in New England is fairly strong.

So it's a mixed bag, and that's what we're seeing in the stock market. There are a handful of stocks in my watchlist of 600 that are showing strength (mostly Oil sector), a handful looking sick, but most of them seem to be buying time, holding on for now. This is not too surprising, with earnings season not yet half-over.

The current round of earnings reports will give us a good idea if the economy is showing a little strength, buying time, or starting to look sick. Expect the overall stock market to pick a direction based on the results. For now, most indexes look like the Nasdaq Composite, showing they are not too optimistic about this earnings season:

Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day.  To find out more, please click on the following link: www.markettamer.com/seasonal

By Gregg Harris, MarketTamer Chief Technical Strategist

Copyright (C) 2013 Stock & Options Training LLC

Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.

Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.

Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.

As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.

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