IM Business Cycle Index Warns of Coming Recession – Update 1/15/2023

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Fall warning green road sign on dramatic clouds and sky. — Fever

BCI is above last week’s level at 262.0, warning that BCIp may reach 18.2 to 27.6 (see Figure 1, magenta curve) earlier than last week’s performance, but not much later. 28 weeks. (See Figure 2). BCIg, the six-month adjusted annualized BCI growth rate of 1.3, is down from 1.5 last week (see Figure 1, blue curve). When BCIg crosses zero, past performance averages a 12-week recession.

iM business cycle directory — Figure 1 combines the BCIp, BCI, BCIg, and S&P 500 with levels (red lines) that must cross to call a recession. Here we notice that BCIp 25 has passed the threshold strongly downwards. Historical data from past recessions shows that at this value the economy never recovered enough to avoid collapse. (iMarketSignals)

Description of the IM Business Cycle Index

In the year In 2013, we compiled the Business Cycle Index from the following basic economic data:

10-Year Treasury Yield (Daily)
3-Month Treasury Bill Profit (Daily)
S&P500 (Daily)
Continues claims that are adjusted periodically (weekly).
All Workers: Total Private Industries (Monthly)
New Homes for Sale (Monthly)
New Homes Sold (Monthly)

A complete dataset from 1967 is available at FRED. By combining the parts of the index, the “real-time” aspect was taken into account, that is, the data is included in the index only on the date of publication, and not on the consecutive days.

The BCI itself does not provide signs of decline, but after a series of further manipulations, two indicators emerged that reliably signaled an impending decline.

It is a well-established method to derive the six-month smooth annual economic growth rate index from the series. We use this method to find BCIg (growth). Here BCIg is calculated with a growth rate of 6.0 added, which in past performance, when BCIg falls below zero creates an average 11-week leading failure signal.
We also found that the BCI rebounds well from the peak of the cycle before the crash. This alternative indicator allowed the BCIp to be derived (the peak difference from the previous BCI). Past performance shows that before the 20-week average decline, the BCIp price crossed 25 to the downside.
In our 2014 article, iM’s BCIw: A Week to Recession Indicator, we show how the BCIp (variation from previous BCI peak) indicator can be converted to BCIw (weeks to ongoing recession) from previous BCIp tracks to the NBER. Failure.

The two indicators BCIg and BCIp can be used as a sell signal for ETFs that track stocks like SPY, IWV, VTI, etc. or in general.

In Table 1, we record the S&P500’s pre-recession high, the price on the BCIg signal day, and then the inter-recession trough price for each crash. From these, we calculate the loss lost by exiting the market on the day the BCIg is marked.

Table 1: Avoidance of losses in Spy when issued with BCIg failure warning.
Note	1	2	3	4	5	6	7	8
Economic recession	PEq	SEnel	TRough	(PT)/P	(ST)/S	(PT)	(ST)	(ST)/(PT)
January -70	106.16	93.24	69.29	36.1%	25.7%	36.87	23.95	65.0%
Dec-73	120.24	103.36	62.28	48.2%	39.7%	57.96	41.08	70.9%
February -80	115.2	100.3	98.22	17.1%	2.1%	16.98	2.08	12.2%
August-81	140.52	128.64	102.42	27.1%	20.5%	38.1	26.22	68.8%
August-90	368.95	332.92	295.46	19.9%	11.3%	73.49	37.46	51.0%
April-01	1520.77	1326.82	965.8	36.8%	27.2%	554.97	361.02	65.1%
January -08	1565.15	1508.44	676.53	56.8%	55.2%	888.62	831.91	93.6%
Average all recession				34.6%	25.9%			60.9%
Column Notes: The S&P 500 peaked in the 1-year period before the Great Recession S&P 500 on iM-BClg signal day S&P 500 pool during recession % – loss from tip to trough % – removed from signal to traf loss Absolute loss from peak to trough There is no absolute loss of signal to traf. % edge-to-edge loss removed

By following BCIg signals from our recession indicator, one could have removed, on average, 61% of total market declines from pre-recession highs to mid-recession troughs, as shown in the last column of Table 2. Exiting the market on signal days eliminates an average of 26% of losses. If one had known the top of the market, one could have avoided the 35% average decline as shown in column 4.

Figure 3 shows the history of BCI, BCIg, and LOG (S&P 500) since July 1967, and Figure 4 shows the history of BCIp, a 56-year history that includes eight recessions, each of which BCIg and BCIp have been able to indicate the current; The weeks leading up to the fall are revealed on the plans.