Hi vic_wattle,
I thought I would give your 'traffic lights' one final look, since you seem to value them so much. However, in the end, I still could not see the point.
The reason being, unless they give reliable 'signals' as to when to buy and sell stocks in the S&P 500, then they do not have much use. The people reading Hotcopper are not running businesses in the US. They do not care about recessions. They just want to know when the best time is to buy and sell stocks, and as I will explain below that is not always dictated by recessions. By the way, I say the S&P 500, because your 'traffic lights' are US centric. That is what they pertain to.
1. US 10y-3m yield curve
When the US yield curve inverts, there will probably be a recession in the US within the next three years. That is great to know. However, is that knowledge going to help people when timing their entry in and out of the S&P 500? No. Take for example, the inversion in 1989. The S&P 500 never really went down. Quite, the opposite. It went on a tear, up ~300% over the next ten years. Even when looking at the three years following the inversions, there is no real consistency in returns. You might as well toss a coin.
What the yield curve inversion means for stocks
2. Global yield curve
I really cannot see the point of including this. "The global yield curve is a 12-month moving average of the yield curves of the 6 countries, each weighted by their GDP" (
Global Yield Curves, Earnings Growth, and Sector Returns). In other words, it is heavily weighted to the US, and you already have that covered. Then, even when accounting for the slight difference that other countries bring to the table, when it comes to inverted yield curves and recessions, there is still the same problem as the US centric version. That is, just because there is going to be a recession, does not automatically mean that stocks are going to down.
3. US initial claims for unemployment
Once again, we have overlap of the indicators and the same problem as the inverted yield curve signals. Naturally, the unemployment rate is going to rise during a recession. However, that knowledge is not going to be useful for timing entry in and out of the S&P 500. Furthermore, what makes it even harder to use, when compared to the inverted yield curve indicator, is that there is no threshold that gets crossed and gives you a 'signal'. By the time you can detect a reliable uptrend, then it is probably too late to sell.
Economic Data to Avoid Bear Markets
4. US LEI
In one of your posts you said, "When the US LEI starts to turn up again is the obvious time to buy at the ground floor of the next cycle." Firstly, do have you a chart that goes back further than 2000, as that sample of 3 is way to small? Secondly, another opinion is that, "the LEI tracks the current market rather than indicating future market movements." (
A Closer Look at the LEI) Actually, it certainly looks like that is a possibility when you look at how it moved during the pandemic. It other words, there is not enough evidence to suggest that when the LEI starts to rise, after going down, that a bottom has been set in the S&P 500.
US Leading Indicators
5. Euphoria (market sentiment)
Completely subjective, so cannot comment.
Conclusion.
I am inspired by your enthusiasm for learning about the economy and the stock market, but these 'traffic lights' and the 'signals' they are giving are only comprehensible to you. If there were traffic lights like these at every intersection, there would be chaos. I mean I understand the logic behind them, but they are not dependable. Also, you mention that you have been trading Australian stocks using these 'traffic lights' such as REH, ARB, etc during 2020, 2021. OK. That is fine. I understand that Australian stocks are influenced by the US, and global equity is global equity, but the more abstract you get, the less your 'traffic lights' are going to matter. As you know, some stocks go down with the market, and then just keep going down, even when the market recovers. It is always a gamble.
