Recessions & the Market

Heather Cullen

Heather Cullen

In The Money

Recessnions and the stock market

Recessions and the Stock Market

As I write this, the debt ceiling is still an issue, albeit more hopeful than it was a couple of days ago. We have had  dire warnings about America’s credit rating going down and a looming recession if America defaults on it’s obligations. No-one wants a recession, but I thought it would be good to look at the effects of previous recessions on the stock market so that we know what to expect.

What is a Recession?

When going down a rabbit hole checking the differeing definitions of a recession I was reminded of the conversation between Alice and Humpty Dumpty in Through The Looking Glass:

‘When I use a word it means just what I choose it to mean – neither more nor less.’

That pretty much sums it up. The generally accepted definition WAS two consecutive quarters of negative economic growth. But since 1979, the NBER (National Bureau of Economic Research) now determines when a recession is taking place. How they do so is completely opaque, but we are assured it takes into account a range of factors. I kept going on down that rabbit hole trying to find out exactly how they do it, but got no real information – but if you want to read about them and figure out how they do it then here’s a link:  Business Cycle Dating Committee Members | NBER.

The Early 2000s Recession

According to the NBER, there was a recession from March until November 2001 Let’s see what happened on the market.

You can see that there was a protracted downturn and the recession happened right in the middle of it. The downturn had been going for more than 6 months, and after the official recession it still had a year to go before it reached its trough, so no real correlation there. According to the 2 quarters definition, there wasn’t actually a recession, as the 2 quarters of negative growth were not consecutive:

Did you know economists have predicted nine out of the last five recessions?

The Great Recession

The official (NBER) dates are December 2007 – June 2009 which match up pretty well with the figures below.

How has French revolution affected world economic growth? Too early to say.

So what was the stock market doing?

Heather Cullen Blog Recession 4

Unlike the 2000s the official recession covered most of the market fall – but also a fair chunk of the recovery as well.

How many economists does it take to change a light bulb?

Seven, plus or minus ten.

The Covid Recession

We can all remember that! It was the deepest drop in GDP since 1954 (that’s how far my data goes back). The bear market and the recession are almost identical timing. It looks as though it lags slightly but that is because I have standardized the dates at the start of the money.

Heather Cullen Blog Recession 5

Here are the actual figures:

Heather Cullen Blog Recession 6

An economist is a trained professional paid to guess wrong about the economy.

Notice anything funny? Right, technically there was a recession in 2022 , although NBER doesn’t think so. It certainly felt like one! Let’s check out what the market was doing:

Heahte rCullen Blog Recession 7

You can see that the GDP figures and the major part of the market drop match up very well. But, according to the NBER, it didn’t happen.

So what does this mean?

Why was astrology invented?

So that economics would seem like an accurate science.

The GDP figures seem to match the behaviour of the stock market better than the official declarations of  the NBER. The Q2 2023 GPD estimate came out today, and it is 1.9%. Not great, but not dire. This may give us a clue about what is likely to happen on the market.

Please note that the above is just my observations. I am not an economist and don’t claim to be any sort of expert, just an interested observer.

GDP Data from: GDP and Spending – Quarterly GDP – OECD Data

“We have 2 classes of forecasters: Those who don’t know . . . and those who don’t know they don’t know. “

John Kenneth Galbraith

The Debt Ceiling

I answered a question on the debt ceiling a few weeks ago, and thought that I would post it here as many of you would have missed it.

Hey Mateo, I’m no expert on the debt ceiling, but here’s my take on it. Since it was instituted in 1917 the debt has been raised 80 times and Congress has never not raised it, so that’s a good track record. The ceiling was reached on Jan 19 this year, and Treasury is using ‘extraordinary methods’ (like moving money from one agency to another when payments become due) which will keep the US afloat until June. Currently Treasury will probably run out of cash in Oct / Nov.

(Latest News: Yellen has just pushed back the default deadline to June 5)

A bill has passed the House of Representatives (30th April) to raise the debt ceiling by $1.5 trillion. However, the Senate is not expected to pass it and even if it does Biden has said that he will veto it. 


Heather Cullen Blog Debt Ceiling

It seems passing strange that a government would veto its own funds, but the reason is that they are holding out for even more funds. The current bill reduces spending to 2022 levels and restricts annual growth to 1%, and the Dems won’t agree to that.

Of course, the question is then ‘what happens if the government runs out of money’? The US would default on its loans. The US credit rating would be downgraded (it was in 2011) which means it would be more expensive for it to borrow money, the dollar would fall (meaning imported goods are more expensive), investment in the US would fall and it would go into a recession.
What will happen this time I don’t know. I have never seen a political situation like it, so I am only guessing. There always seems to be a lot of posturing and brinkmanship as the deadline gets closer, and politicians in recent years have become more polarized and hence unpredictable. The idea that a President would deliberately put his country at risk of default and the pain it will inflict on the American people is something I just can’t get my head around. But I try not to comment on political situations, everyone feels so strongly about it these days!
How will it affect us? Well, if the govt does not accept the debt ceiling proposed and makes the US insolvent the market will crash. How big and how deep I don’t know – that depends on how pig-headed politicians can be! It’s watch and wait as usual.

Daytrading Experiment

Tom Hougaard has had threats made against him and so is stepping back until at least 12 June. This is part of his message :

Heather Cullen Blog Tom Hougaard

It’s pretty sickening when people feel it is OK to threaten you – I’m sure we’ve all had it. I certainly have. One of the more colorful was someone saying they were going to track me down and kill me, then p**s on my grave. Charming!

The Market Report


It looks like we have broken out of consolidation, and its going the right way –  hooray! We’re still not out of the bear market, but we are closing in on it. All we need is a rise of  2.5% and we are there, but we are still a fair way away from the previous high of $477 (January 2022)

On the chart below I have drawn in the Darvas boxes. It is another way of looking at consolidation / support / resistance. It will be interesting to see if and for how long we stay in the new box. Nicholas Darvas was the author of  How I made $2,000,000 in the Stock Market – it’s a good read.

Heather Cullen Blog SPY chart


SPYG is following the same path as SPY, closing in on the bear exit. I’ve drawn in the Darvas boxes – see SPY for explanation.

Heather Cullen Blog SPYG chart

QQQ (Nasdaq ETF)

I know that QQQ is not part of the ITM strategy, but as the largely tech stocks that make up a large part of both SPY and SPYG its worth keeping an eye on. QQQ has exited the bear market way back in March, and is headed up. You can see the consolidation in the Darvas box, but it shows no sign of creating another box as it is in an uptrend.

It is still off it’s prior highs of $403, but remember that it dropped a lot more than SPY and SPYG so its recovery is more spectacular.

Heather Cullen Blog QQQ chart


Heather Cullen In The Money Blog ITMeter

Summer of '23

Heather Cullen Blog Santorini

This blog post is a little early as I will be in Santorini. The hotel I am staying at is quite a distance from the town so the wifi may be a bit flaky. Here’s where I’ll be, sipping a cocktail and admiring the sunset. Yes, hard work, I know, but someone’s got to do it!

Well, let’s hope they get the debt ceiling worked out and we can get on with making some lovely profits again!



Heather Cullen Blog Baby bear

P.S. Apologies if I have offended any economists with the jokes. Just thought we needed a laugh. Please don’t sue me or kill me and desecrate my grave!

12 thoughts on “Recessions & the Market”

  1. (Posting an email question)
    Hi Heather!

    Now that the market has risen, I feel it might be an opportune time to move up in strike prices. I currently hold SPYG Sep15 strike 30. At 60% of the market price of $59, the strike would be 35…Effective price of 35 strike Sep 15 is $59.50, which is around 1.01% of the market price – $59.

    It’s too soon to move out since Sep 15 is my option expiry date (98 days away), however it may be right time to move up in strike.

    I would love to hear if you agree or not!

    1. Hi Eli
      Yes, if you want more than 50% leverage then move your strike up to $35. I see the Dec $35 ia $24.40 / $25.00 (bid / ask) so this may suit you. If you are going to roll up I would roll out as well – no particular reason, just that you will have more time on your side and wont have to roll so often.
      Hope this helps.

  2. Hi Heather,

    Another question for you. How do you do back testing? My charting platform (Trade Station) does not let me pull up option prices from the past plus current option prices only let me see the prices from the past 30 days or so. Any advice or help would be most appreciated!


    1. Hi charity – re backtesting and getting option prices – yes, this is well-nigh impossible because option pricing changes day to day and minute to minute. BUT if we are using a strike at, say, 50% of the current price then we know that there is very little time value and the option price plus the strike will be less than 1% above the current price. We can then use that to estimate the option price in the past.
      So, for example, if SPY was trading at $400 and you wanted to know the price of the $200 strike option then you can use $404 (1% above current price of $400) minus the strike $200 so your option will cost $204.
      Clearly, that overestimates the actual option price (as you can usually get it for less than 1% above current price at 50% leverage (i.e. strike at half price), so the bacltesting tends to underestimate profits, but that is good.
      When backtesting, I assume that if I am selling an option with less than 90 days to expiry then it has lost all time value, so again this underestimates results.
      I think 2? 3? posts ago I had a section on ‘How to do backtesting’ which may be helpful. Yes, found it, here it is: – it is about backtsting SPYG alternatives but the principles are the same.
      Hope this helps

  3. Hi Heather,

    The SPY has crept up in price since I bought the option on January 27th. I bought a $200 call with an expiration of September 15th. Since the strike is less than 50% of the current price, should we think about rolling it up soon?

    I thoroughly enjoyed reading your books and following your blog. You give very informative insights and are very helpful to those of us who don’t do well trading on our own.

    Much thanks,

    1. Hi Charity, yes rolling out and up is a good idea. Today, SPY has closed at $427.92 So I would look for a strike between $215 and $240 (depending on your risk tolerance!) and an expiry date of January 2024 or later.
      Its so good to see SPY going up again!
      (and thank you for your kind words)

  4. Heather, I just bought and read 3 of your books. Thanks for writing it. I’m implementing it in my retirement account. I just wanted to clarify one thing. You buy 1year DTE and sell around 2 weeks before expiration (assuming no death cross)? Aren’t you subject to a lot of theta decay the last 30-60 days? Is there any advantage to roll out every 6 months? Have you back tested optimal time to roll out? Any info or resources you have on this would be greatly appreciated.
    (This is from John, posting it here so that I can answer it)

    1. Hi John
      Posting it here so that others can see the response as they are good questions.
      Re time decay in the last 30 – 60 days yes, you are right about that being the time that decay really kicks in, but because we are buying options with less than 1% time value we have limited our losses on that front. Of course, there is nothing to stop you rolling earlier – it’s a good idea, just that I was trying to make the ITM strategy as quick and easy as possible, hence the idea of a once-a-year roll.
      Re rolling every 6 months – yes, now that brokerage costs are negligible that is a good idea – as above, was just trying to keep the strategy as simple as possible.
      Re optimal time to roll out in backtesting – I backtested with the rule that if the position was rolled with more than 90 days to expiry then the time value was not lost, but if there was less than 90 days then the entire time value was lost. So you can see that the backtest results are a worst-case scenario, the actual results would be better – as always I make sure that I am not cherry-picking the data or gilding the lily.
      Good questions, hope this answers them.

  5. I am shocked that people have threatened you and Tom Hougaard. May you be well and happy.

    1. Hi Kate – thank you! Its not pleasant but I guess it comes with the territory. There are a lot of crazies out there, and the anonymity of the web seems to embolden them. I figure that they are just keyboard warriors that in real life would be real cowards as they are not game to put their real names on their threats. But thank you for your kind wishes. x h

  6. Enjoy your well-deserved trip, Heather, that’s a beautiful pic. Thanks for the tons of information you put out.

    Best Regards,

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