The Lipstick Effect: Predictive Recession Patterns

[Archives]( Live]( [Twitter]( [Youtube]( [Instagram]( [Discord]( [Tiktok]( [December 20 at 7 p.m.: It's Mistletoe Mania - $10,000 Up for Grabs]( Do you want to know the greatest stock picks of 2023? Do you want a surprise gift of $1,895? Do you also want the chance to win part of a $10,000 prize next year? [All will be revealed at Mistletoe Mania 2022. RSVP NOW]( MAIN STORY The Lipstick Effect: Predictive Recession Patterns By Tom Gentile. Dear reader. The “Lipstick Effect” has kicked in, and along with economic data, it is pointing to an economic downturn and possible recession. In beauty circles, the Lipstick Effect is claimed to be the category’s leading economic indicator. Mainly, because in times of economic stress, women will indulge in discretionary purchases that provide an emotional uplift without denting their budget – that item happens to be lipstick and it alludes to recessionary conditions. Now, you know I like patterns in stock trends, so let’s look into the impact of the Lipstick Effect, but then I’ll show you other patterns that can be used to make money, regardless of how much lipstick is being applied out there. The Psychology Behind the Lipstick Effect Texas Christian University professors led an academic study entitled “Boosting beauty in an economic decline,” which includes the lipstick effect, and found that when the stress of recessions is increased, the desire to purchase beauty products also increases, while spending on items like furniture, electronics, and leisure/hobby products declines. And economists have established that recessions are reliably associated with increases in spending on otherwise traditionally inferior goods (tuna verses salmon) and morale boosters – like lipsticks and other beauty products. Even though the lipstick effect may have some anecdotal lore, research has it that women’s spending on beauty products may be the third indicator of economic recessions – rooted in psychology. Back in 2001, Leonard Lauder, chairman of Estee Lauder, saw a spike in lipstick sales after the 9/11 terrorist attacks and he also noted a boost in sales during the 2008 recession; and why not trust in the lipstick effect – after all, we seek other strong indicators of recessionary conditions such as inverted yield curve patterns. Well, this year we’ve seen both, an inverted yield curve and an increase in lipstick sales. But can these patterns make you money like other patterns you’ll see on charts? Let’s find out. Patterns To Make You Money We may see patterns of a predictive nature, like inverted yield curves, and, ahem, lipstick sales, but let me share patterns I utilize in trading decisions. You may have heard of the “Death Cross” and the “Golden Cross,” which are simple moving average lines denoting long-term trend changes in a stock’s price. When the 50-day simple moving average line crosses above the 200-day simple moving average the outlook is bullish for the longer-term. But signs of stress and future bearish market trends are supposed when the 50-day moving average falls below the 200-day. Just look at the chart below: It illustrates the long-term trend change occurring in mid-March 2022, as the death cross appeared (50 SMA closes below 200 SMA). For long-term investors, this pattern of moving average line cross overs is valuable because it indicates the potential for a down trend over an extended period of time, so investors can act on the pattern by reducing investments and prepare to capitalize on downward market pressures. You can see from the chart above that prices have struggled ever since the bearish crossover occurred. Now, long-term investors may simply be watching for the Golden Cross, which is when the 50-day SMA crosses above the 200-day SMA, signaling the potential for long-term bullishness. The 10/30 SMA Cross Several types of trades my readers have placed this year have lasted a matter of days to weeks, so instead of focusing on long-term patterns, it is short-term trend patterns that I look to. Although there are multiple lines of code involved in my software, the first two lines of code include simple moving average (SMA) lines. In the graph below you can see the power of a 10-day SMA crossing above and below the 30-day SMA. The crossover pattern is powerful and creates a clear picture of when the short-term trend changes directions – the 10-day crosses above and below the 30-day. It’s a simple test to determine if the trend is pointing in the direction my trade requires. Obviously, more than just the moving average crossovers are part of my trading decisions, but, as you can see, patterns in trends can be tremendously helpful in improving your odds for successful trading. So, whether patterns are found in lipstick sales, inverted yield curves or simple moving average lines on stock charts, you’ll find that repeatable patterns can make a difference in the number of successful trades you take on. Talk soon, Tom Gentile America's #1 Pattern Trader Join Tom each Monday through Wednesday at 12:00 p.m. ET as he discusses a range of strategies to make money in a strained market environment. Did you miss the Live session? 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