Spotting Recessions and Bear markets: Schannep Recession Indicator vs. Sahm rule

Which one is even better? Spoiler alert: Schannep's

The "Sahm Rule" is a well-known recession indicator created by Claudia Sahm, an economist who worked at the Federal Reserve. This rule identifies the early stages of a recession when the three-month moving average of the U.S. unemployment rate rises by half a percentage point or more above the lowest three-month moving average unemployment rate from the previous 12 months.

However, another lesser-known recession indicator with a nearly perfect track record was created almost 20 years before the Sahm Rule. This is the Schannep Recession Indicator. Despite its accuracy, it hasn't received as much attention because its creator did not work for the Federal Reserve. You can learn more about it here:

https://schannep.com/

Key Differences Between the Indicators

1.    Reference Period for the Lowest Unemployment Rate:

Sahm Rule: Uses the lowest three-month moving average unemployment rate from the previous 12 months.
Schannep’s Indicator: Uses the absolute lowest unemployment average without the 12-month restriction.

2.    Threshold for the Alert:

Sahm Rule: Triggers an alert when the unemployment rate increases by 0.5 percentage points above the reference low.
Schannep’s Indicator: Triggers an alert when the unemployment rate increases by 0.4 percentage points above the reference low.

Why It Matters

Schannep’s Indicator has successfully signaled all 13 of the last recessions, with 10 of these recessions followed by a bear market. Subscribers to our newsletter know how to trade and adjust their portfolios before the storm hits.

This impeccable record highlights the importance of closely monitoring the unemployment rate as a critical economic indicator. By understanding and comparing these tools, investors and policymakers can better anticipate economic downturns and make informed decisions.

Sincerely,

Manuel Blay

Editor of thedowtheory.com

 

 

Back to "divergent" interpretations of the Dow Theory

 

Setting Dow Theory concepts straight amidst so much "fake" Dow Theory.

Recent Transport weakness relative to the Dow Industrials prompted many “experts” to proclaim that this is a bear market signal. Let’s clarify the concepts.

First, divergence and lack of confirmation, while similar, are not the same and have different implications. Divergence entails one index being higher, whereas the other is lower.

Lack of confirmation means that one index makes a higher high (or lower low), and the other index fails to break out while agreeing in direction.

Rhea studied divergences; contrary to common wisdom, they don’t question the current trend. Normally, they are resolved in favor of the existing trend. Mark Hulbert recently provided data confirming this assertion (see chart below). 

Lack of confirmation merely serves as a yellow light that may question the persistence of the current trend, but it is NOT, as many purport, a signal showing a change in the trend.

Finally, most Dow Theorists are fixing their eyes on the wrong relevant highs. All-time highs (lows) are not necessarily the relevant highs to be surpassed by both indices. In most instances, relative highs (or lows) are the appropriate vital levels to watch.

Therefore, most analyses we read will likely do more harm than good to our portfolios.

These old posts shed more light into what I call “heretical” (or plain wrong) interpretations of the Dow theory:

http://www.dowtheoryinvestment.com/2022/10/dow-theory-update-for-october-12.html

http://www.dowtheoryinvestment.com/2019/02/dow-theory-update-for-february-4.html

http://www.dowtheoryinvestment.com/2019/04/dow-theory-update-for-april-5st-back-to.html

http://www.dowtheoryinvestment.com/2019/04/dow-theory-update-for-april-13rd-back.html

To close, I'd like to stress that most Dow Theorists don't back their questionable assertions with a track record. You can find ours HERE.

 

Sincerely,

Manuel Blay

Editor of thedowtheory.com

Gold and Silver Surge: Dow Theory Confirms Bullish Primary Trend on 5/17/24

Overview: Higher confirmed highs by SLV and GLD (silver and gold) have reaffirmed the primary bull market. The secondary reaction is over.

The most recent pullback in the gold and silver miners’ ETFs (GDX and SIL) was so modest that it did not qualify as a secondary reaction. So, a bull in full gear.

General Remarks:

In this post, I extensively elaborate on the rationale behind employing two alternative definitions to evaluate secondary reactions.

GLD refers to the SPDR® Gold Shares (NYSEArca: GLD®). More information about GLD can be found HERE.

SLV refers to the iShares Silver Trust (NYSEArca: SLV®). More information about SLV can be found HERE.

A) Market situation if one appraises secondary reactions not bound by the three weeks and 1/3 retracement dogma.  

I explained in this post that the primary trend was signaled as bullish on 4/2/24.

Following the 4/16/24 highs, there was a pullback until 4/30/24 that lasted 11 trading days. Such a pullback met the time and extent requirement for a secondary (bearish) reaction against the primary bullish trend. After the 4/30/24 lows, a powerful rally emerged that surpassed the 4/16/24 highs. SLV broke topside its 4/16/24 high on 5/15/24, while GLD did so on 4/17/24.

The Table below shows the relevant data summarizing the most recent price action.

 The chart below shows the secondary reaction (Step #2, brown rectangles) and the rally starting the 4/30/24 lows (Step #3, blue rectangles). The blue horizontal lines highlight the 4/16/24 highs (Step #1), whose breakup reaffirmed the primary bull market.

 Therefore, the primary and secondary trends are now bullish, and the secondary reaction has been canceled.

B) Market situation if one sticks to the traditional interpretation demanding more than three weeks and 1/3 confirmed retracement to declare a secondary reaction.

I explained in this post that the primary trend was signaled as bullish on 4/2/24.

The most recent pullback did not last at least 15 trading days, so it did not qualify as a secondary reaction.

So, now the primary and secondary trends are bullish.

Sincerely,

Manuel Blay

Editor of thedowtheory.com