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#26 S2N: The Worlds most Accurate Recession Indicator

#26 S2N: The Worlds most Accurate Recession Indicator

micksonmatch
March 21, 2024

In today’s issue:

NAAIM Exposure Index
The best indicator for predicting global recessions

Today’s Spotlight

I wanted to introduce you to a series of sentiment indicators that I want to explore to see whether they provide us with an edge.

The NAAIM Exposure Index represents the average exposure to US equity markets reported by its members. The index depicts a two-week moving average of the NAAIM managers’ responses.

As the name indicates, the NAAIM Exposure Index provides insight into the actual adjustments active risk managers have made to client accounts over the past two weeks. You can see in the latest exposure reading from last week that the index was at 104%. That is clearly very bullish.

I have spent way too many hours today trying to build a strategy using the exposure index as a market timing signal generator. I wasn’t successful, but I know what I need to do to improve the strategy. I am going to share a naïve strategy so I can build on it and you have a baseline.

In my strategy, I have sold any open position with an exposure reading above 100 and bought the market when it was below the 100% threshold. The re-entry into the market after a sell signal needs me to have a fresh brain to code. The problem is that the exposure index is very spikey at the extremes and comes straight down, so all that happens is that we sell and then almost instantly get back into the market. Leave it with me.

S2N Insights

In the history of modern finance, no single indicator has done a better job of predicting when the next global recession will start than when the Bank of Japan starts raising rates. I try not to use other people’s research, but this was so appropriate with the BOJ raising rates this week.