One thing the 2007 recession taught us is how horrible the equity market was at forecasting economic contraction. The S&P 500 peaked in October 2007, just two months before the recession officially began. By contrast the 2001 recession saw the S&P 500 peak nine months earlier.

For whatever reasons this market has become far more short term focused. Macro events have less of an impact on price versus short term technicals or trade set ups. Whether it is due to the explosion of computer algorithm trading, intraday traders, ADHD no one knows.

The following chart highlights the last two recessions. Notice the forecasting ability of both equities and treasuries.

2001 Recession - begins Q1 2001

Treasuries peak January 2000, 11 months earlier

Equities Peak March 2000, 9 months earlier

2007 Recession - begins Q1 2008

Treasuries peak June 2006, 18 months earlier

Equities peak October 2007, 2 months earlier

Treasuries peaked most recently in April 2010, 13 months ago. The S&P 500 so far has peaked May 2011. Economic activity has rolled over since April. Are we looking at economic contraction in the next few months? The treasury market indicates we very well may.

By Tony Pallotta

http://macrostory.com/

Bio: A Boston native, I now live in Denver, Colorado with my wife and two little girls. I trade for a living and primarily focus on options. I love selling theta and vega and taking the other side of a trade. I have a solid technical analysis background but much prefer the macro trade. Being able to combine both skills and an understanding of my "emotional capital" has helped me in my career.

© 2011 Copyright Tony Pallotta - Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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