Chances of a Recession- Part 3, Dividend Cuts

Ironman at Political Calculation has updated his commentary and charts today showing the trend in dividend cuts, as it relates to the probability of recessionary conditions. (It is a great, quick read and can be found here.) Essentially, his analysis shows that the likelihood of recessionary conditions increase when the monthly number of dividends cuts rise above a certain threshold. The results of the analysis jives well with what I am seeing for increased recession risks- detailed here and here.

Well, I thought it would be illustrative to expand on this research and look out over a greater time frame, here 20 years. Using the companies currently in the S&P 1500- and yes, I understand this exposes the analysis to a survivor bias, but I am not about to reconstitute the S&P 1500 going back for 20 years- I calculate the rolling 3-month summation of companies cutting dividends monthly. The chart below shows the rolling 3-month summation of dividend cuts for the companies in the S&P 1500 and compares it with year-over-year percentage change in GDP.



The results here are confirm Political Calculation's initial supposition. It appears that when the summation of dividend cuts rise above 50, so does the probability of a recession. This model suggested recessionary conditions were occurring in the early part of the last decade and were spot on as a tell for the great recession. Time will only tell if the current rise above 50 is telling us that we are in recessionary conditions are something else entirely.

Price/Volume Diffusion Index Remains Positive But...

It has been a few weeks since I publicly updated my Price/Volume Diffusion Index. The diffusion index continues to increase, currently sitting at 68.3. The recent track of the diffusion index is shown below.

The Price/Volume Diffusion Index level remains positive, suggesting higher equity prices in the future. However, this comes with a note of caution. The index continues to tick higher primarily on the positive inputs through Feb 19th, as the the index is calculated using a one month look back. The Price/Volume Diffusion Index is in contrast to the rolling summation index, which has rolled over from Feb 19th high. The updated summation index is show below, noting the turn in the index over the latest week.

The summation index is rolling over as S&P 500 has been selling off on increased volumes in recent days. This is a negative event, in my opinion, as the sell off is occurring as the price of the S&P 500 rolled into the November/ December 2007 volume downdrafts. This indicates a significant supply line at these levels, and unless support materializes lower prices could be in the offing.