No Comments Written by Anthony Truong on February 26, 2008 – 7:15 pm

Question: Well I finally sold the bulk of my holdings with a relatively small loss, so I think I’m happy. Still have other holdings though, but I’m not sure if I’m ready to sell yet. This big crash you are expecting seems to not want to come out of its shell yet? From a contrarian view, when everyone starts talking recession and doom, isn’t it the case that it may not materialise at all?

Answer: It’s a good thing that you’re decreasing your holdings; that’s what smart investors/speculators do as prices move up, against what the rest of the crowd does.

Like I’ve said previously, I’m not advocating any drastic action at this point, seeing as these choppy markets are hard to read. But I do recommend the use of guaranteed stops at relatively tight levels to current prices. If there is a surprise, you don’t want to be caught holding and hoping.

Everyone’s talking recession, but no one is talking stock market crash. The problem is that people think that the economy affects the stock market, but it’s actually the other way around. Stocks fall, then you get economic contraction. Stocks rise, you get economic boom times. You just have to look at any historic chart to see this relationship.

Also, the US is ALREADY in a recession, but as we’ve discussed previously, you don’t know you’re in a recession until the economic numbers come out, and they tend to lag for months. But what is a good indicator of recession or boom is the Institute of Supply Management’s US Non-Manufacturing Sector Composite Index (the January 2008 report can be accessed here), which had one of its biggest spikes down last month. This is concerning because it’s below 50, the line between contraction and growth. And the last few times there was a good spike down, a US recession resulted. Here’s a chart showing the index and the recent drastic fall.

You have to separate your ideas about the economy and the financial markets; although they appear interrelated, they aren’t really, at least not in the present. Financial markets move according to financial rules, economies move according to economics. Very different creatures.