Live: Friday, April 3, 2020

2:15 p.m. New York time

My go-to recession indicator is the Sahm Rule, which was developed a year ago by a Federal Reserve economist, Claudia Sahm. It is tracked by the Federal Reserve’s charting system, FRED. I’ve set the chart to show how the Rule responded to the last three recessions, in 1991, 2002 and the big one, the Great Recession of 2008 to 2010.

Screen Shot 2020-04-03 at 11.25.43 AM

(Click here for a fully interactive chart.)

The goal of Sahm’s rule is to give the government early warning that it would need to start pumping money into the economy. It is a leading indicator compared to the official declaration of a recession, which normally comes a year after the downturn began.

Under Sahm’s rule, a reading 0.5 means the recession is underway. The reading for March was 0.3, and data gathering for the Rule’s underlying report, the Employment Situation, began before the coronavirus layoffs had become widespread.

As the chart shows, the reading we had for March is unusually high and corresponds to just before the Great Recession kicked in.

So Sahm’s Rule says, No recession yet, but we’re heading that way. And I say, We’re in a recession already, and next month’s indicator will clearly show that.

1:55 p.m. New York time

We’re nearing the end of the fourth hour of decline in the S&P 500 today, and my inclination, using Elliott wave analysis, is to interpret it as a continuation of the 5th wave down  in the Intermediate degree decline that began this morning. A move below 2174.00 would confirm that interpretation. Under the Elliott wave model, it need not move below that level to count as a valid 5th wave.

My short bear call options spread position from 51% down to 45% of their maximum potential loss. They are well out of the money — where the profit is — with 42 days to go before expiration, on May 15. So this represents a return to more normal trading, for the moment at least, compared to the rapid panic selling of later February and early March, when I was rolling positions forward within a week, sometimes after only a day.

Management day, when I exit all profitable positions, is April 24, which is 21 days before expiration.

By Tim Bovee, Portland, Oregon, April 3, 2020


Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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