Predicting a Recession is Messy and Inconsistent
Predicting a Recession is Messy and Inconsistent
By the time they’re confirmed, markets may have already reacted and moved on
Recessions are usually called after they’ve already started. That’s why by the time official confirmation comes, markets may have already reacted and moved on.
Yield curve signals are messy and inconsistent. Inversions can occur well before any downturn, and sometimes without one at all.
These indicators are noisy or lagging. Acting too early can mean sitting on the sidelines while markets continue higher for months — or even years.
As an example of how messy things can get, Polymarket shows a 39% probability of a recession, down from 65% just a month ago. So, had you looked at Polymarket for financial advice, you would have missed this rally back up.
As historical data demonstrates, inversions have occurred multiple times without immediately triggering market downturns — in many cases, markets continued their upward movement for extended periods following these inversions.
Therefore, adopting a defensive "the sky is falling" position and waiting for a predicted collapse based on this indicator ultimately undermines long-term investment success.
At tastylive, we don't trade off headlines — and we definitely don't pretend to predict recessions. Instead, we focus on where opportunity is showing up in the market right now, using volatility and mechanical strategies to guide our decisions.
Duration serves as one of our best tools for managing uncertainty. Holding positions over time as part of a defined mechanical strategy enables us to absorb short-term fluctuations, let probabilities play out, and reduce timing sensitivity. We also emphasize selling premium around core positions through strategies like covered calls on long stock to reduce cost basis and short puts as synthetic entries at a discount, both of which offer higher probabilities than simple limit orders would.
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Two Trade Ideas
NVDA ($134.92) Put Diagonal (JUL/JUN) $4.81 Debit
Nvidia (NVDA) closes out earnings season tomorrow after the close. The stock has rallied alongside the market back to just about 10% from all time highs. Volatility has come out significantly with IVR at just 27 — maybe the good news is already baked in here for a "buy the rumor, sell the news" type event. Buying the JUL 130 put and selling the JUN 120 put provides around 20 short delta for just $4.81 playing for an inside/down move after earnings.
HIMS ($55.56) Call Ratio Spread (JUN) $0.35 Credit
Some of the higher vol small/mid cap stocks have been flying recently, Hims & Hers Health (HIMS) and the quantum computing stocks in particular. Into these price moves, skew tend to increase to the upside. High flying stocks after all often "crash to the upside," so skew is often greater on the call side. Ratio spreads play into skew in that they will be much wider on the skewed side, so being long the ATM 56 call and short 2x the 64 strike calls provides $8 of potential intrinsic value with no risk to the downside.
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Michael Rechenthin, Ph.D., (aka “Dr. Data”), managing director of research and development, has 25 years of trading and markets experience. He’s known best for his weekly Cherry Picks newsletter. On Thursdays, he appears on Trades from the Research Team LIVE.
Nick Battista, tastylive director of market intelligence, has a decade of trading experience. He appears Monday-Friday on Options Trading Concepts Live. On Wednesdays, he co-hosts Johnny Trades. @tradernickybat
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