Silver Linings: Recessions Can Spell Opportunity

Thursday January 17, 11:30 pm ET By Jonathan Bernstein, ETFzone Contributing Editor

Credit is contracting, broad market ETFs are selling, and the markets are signaling recession. While long-term investors may want to position for a recession, for traders the recent sell-off represents a short-term buying opportunity.

The recent sell-off is poorly understood. First, the U.S. is not yet in a recession, defined as two consecutive quarters of negative GDP growth (GDP grew in all four quarters of 2007). Second, it is not unusual that the markets are already falling on recession fears. The S&P tends to fall 3-6 months ahead of a recession and to bottom out about 3 months prior to recovery. And third, the recessionary trade: short equity ETF positions and long bond ETF positions, long volatility, long defensive sectors such as healthcare and consumer staples is in fact unusually advanced for this early in the cycle.

Read more...