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What are the key indications that the recession is coming to an end?

LIKE economists who - as the old joke has it - predicted ten of the last three recessions, financial speculators are typically long on theories about what might indicate the end of a bear market or a recession. Here is just a small selection: Copper/Commodities COPPER - or Dr Copper - is famously said to have a PhD in economics as it has an uncanny ability to predict future expansions and contractions because it is the world's most widely used metal. Having tumbled from a high of $380 down to $140, copper is now on a strong uptrend at $240. If China and the other emerging economies prove to be resilient, this may continue. However, the rise may simply be an alternative one-way bet on the strength of newer economies in the same way as buying mining stocks - incidentally, up 66 per cent since March lows.

Baltic Dry Index THE Baltic Dry Index tracks worldwide international shipping prices of various dry bulk cargoes, and an increase in the BDI is regarded by many as an important indicator of an improving global economy. How this translates to the stock market, however, is unclear.

Traditionally, the BDI and the S& P 500 have had a positive correlation but, like many assumed financial axioms recently, that may have unravelled recently and the pair have occasionally been moving in opposite directions.

Packaging SIMILARLY, watching the packaging sector can help when trying to read the economy. Essentially, the theory goes, most companies who manufacture consumer goods need packaging for their products. These boxes and wraps need to be ordered in advance, so by watching packaging companies' performance, you can discover when major increases in the demand for packaging has occurred and gain a sense of what is happening in the economy. More packaging means more products being sold.

More products being sold (should) mean more profit for a company.

Sentiment SENTIMENT is difficult to measure as there could be a massive difference between a person's actual mood and how he tells you he's feeling.

So a decent measure of real sentiment is thought to be cash. At the top of a bull market, most investors will feel that 'cash is trash', as it is better put to use investing in things like shares.

Conversely, at the bottom of a bear market, when after years of swingeing losses all you care about is holding onto what you have left, cash becomes king..

According to a recent report by Nomura's equity research team, holdings of cash in the US market are bigger than at any point since 1992 and about 50 per cent higher than at the bottom of the last bear market in 2002.

Over the past 50 years, Nomura reckons that cash (or equivalents) has averaged 86 per cent of the value of the stock market - so for every $1 of shares, the average investor has had 86 cents in the bank. Today, the ratio is around $1.40 of cash for every $1 of shares.

Clearly, investors are not hoarding their savings because of fantastic deals at the local building society, so the logical explanation is that punters are still too nervous to buy shares, despite the recent market rally.

Unsurprisingly, tracking the movement in this ratio shows a close correlation between cash levels and share valuations. When investors are nervous, cash levels are high and valuations are low.

So can high cash levels be a buy single? Well, yes. The level of cash indicates the likely next move by investors as if everyone has already invested, there probably aren't any new buyers of shares. That should mean that prices can only go down.

Conversely, if investors have plenty of cash there may be plenty of new buyers waiting for when they think the price is right. So cash on the sidelines can fuel a new bull market.

Other short sellers LAST year, research headed by Bala Balachandran, a professor of accounting information and management at the Kellogg School, seemed to confirm the view that heavy short selling of a stock indicates problems for a company.

The team chose the Nasdaq market as the source for their data as "Nasdaq depends on more technology-oriented industries with shorter lifetimes for their products", and "people can take advantage to make money by selling the companies short".

"The results were quite intriguing," says Balachandran, who reported that firms with large short positions experience negative and significant abnormal returns when they are heavily shorted.

"The negative abnormal returns are increasing in the level of short interest, suggesting that a higher level of short interest is a stronger bearish signal" the report added.

The results are consistent with short sellers possessing private information, and the team's results also suggest that short sellers target highly liquid firms whose prices are high relative to their fundamentals.

Coppock THIS is a far from foolproof indicator - and it doesn't show up very often -

but Coppock is supposedly the closest device investors have to a signal that it's safe to start buying shares again.

According to the Daily Telegraph, Coppock has now turned positive for nine major markets and another seven in the emerging world. The FTSE 100 is not yet one of them, but it looks very likely join in by the end of June.

The Coppock indicator was created by a devout Christian called Edwin Coppock in the early 1960s, after the Episcopalian church turned to him for help (rather than divine intervention) in timing its own stock market punts.

Coppock took the value of the Dow Jones Industrial Average and compared it with its value 11 and 14 months ago (the church's time frame for how long it thought it took people to recover from a serious setback such as a bereavement). He did this every month for ten months and then, by giving greater weight to the most recent readings, he calculated a single figure.

For a spread bettor, the mechanics of this are largely unimportant, but what matters is the trend. As long as the numbers are falling, Coppock says punters should stay out of the market, but as soon as the measure turns upwards and pushes above zero, they should start investing. When this happened in the past, the market had usually just bottomed out.

Coppock was right in 1975 and again in 1982. When the indicator turned positive in November 1992, it rewarded investors with 27 per cent gains in 14 months. It did it again in May 1995 - and speculators booked 61 per cent in just over two years.

But it's not infallible. Coppock has worked well in recent decades, when economic downturns have tended to be relatively shortlived and followed by fairly rapid recoveries. However, it got things badly wrong in November 2001, putting speculators back into the market a year early. And - even worse - had it existed during the 1929-32 stock market crash, it would have been a disaster, when Coppock would have dragged investors into the worst sucker's rally of them all at levels well above where shares finally ended up in the depths of the Great Depression..
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Copyright 2009 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Sports
Publication:The Racing Post (London, England)
Date:Jun 20, 2009
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