Blog Archives

iM’s BCIw: A Weeks to Recession Indicator

Economic indices, each a combination of a different set of economic data, often signal contradictory states of the economy.   Not surprisingly, many prominent analysts relying on these indices have made incorrect forecasts.  To aid recession forecasting, we now introduce the BCIw, an index derived from our iMarketSignals’ Business Cycle Index (BCI), calibrated in weeks to recession. Yes, you read this correctly; for example, if the BCIw has a value of 19 it indicates that there is a high probability of a recession starting in 19 weeks.
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BCIp (or BCI in Off-Peak-Mode): 20 Weeks lead to Recessions

We analyze financial series based on the previous highest peak of the series in a business cycle, which we term the “off-peak-mode” of an index. Using our BCI in off-peak-mode we achieve average leads to recessions of 20 weeks. Exiting the stock market at these early signals significantly improves investment performance. Furthermore, the current level of the BCI in off-peak-mode near 100 provides confirmation that a recession is not likely to occur within the next year.

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Exit Signals for the Stock Market from iM’s Business Cycle Index

There is no bell ringing when the market peaks before recessions, but indicators such as iMarketSignals’ Business Cycle Index (BCI) are useful in identifying recession starts well in advance. By exiting the stock market at the time of BCI’s recession signals, investors would still have avoided about 60% of the market declines from pre-recession peaks to inter-recession troughs on average.

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iM’s Business Cycle Index replaces ECRI’s WLI

Knowing when the U.S. Economy is heading for recession is paramount for successful investment decisions. We have designed the weekly iMarketSignals Business Cycle Index (BCI) so it would have provided early reliably warnings for the past seven recessions. We achieved recessions leads averaging 11 weeks, all with similar lengths. The absence of false positives, for the analyzed time period of 1967 to 2013, enhances the quality and reliability of the recession warnings.

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Recession Indicators: A Stock Market Exit Strategy.

Investors with long-time horizons can also do well by only exiting the stock market at beginnings of recessions and returning to the market when the market is recovering. Recession indicators such as COMP are useful in identifying recession starts.

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