S&P Drawdown 20181116

We’ve seen an overall trend reversal in Global Stock Indices from up to down, currently 11 are technically in a bear market.

Analysis & Quotes Chart Defined Trend Overall Composite
S&P 500 Down Sell
Nasdaq Down Sell
Euro Stoxx 50 Down Sell
Euro Stoxx E600 Down Sell
DAX Index Down Sell
CAC 40 Down Sell
Swiss Market Index Down Sell
Hang Seng Index Down Sell
Nikkei Down Sell
ASX 200 Index Down Sell
FTSE 100 Down Sell
News last hour Last 24 hours Last week

For long term trend following programs major trend changes are always costly.

For the S&P collar ATA  February 2018 was the first larger than normal  draw-down for 2018 generating an Intra-month loss of ($7,910) on 12th of February 2018.

We did see a  recovery of +3,375 before to the end of February 2018 but still closed the month out with a net loss ($4,175). Although this draw-down was deep it was quick and we had a full recovery with net new equity high by the end of March 2018.


S&P Performance February – March 2018 (Collar Program)

As of 16 November 2018 we are now experiencing yet another large draw-down of ($8,989) surpassing February’s by over $1,000 putting us ($3,468) from the all time previous worst case of ($12,457).


S&P Performance August – November 2018 (Collar Program)

Although this draw-down is deep it is consistent with other draw-downs we’ve experienced  during other major trend changes for the life of this program.

Previous draw-downs

November 2007 Intra-month ($12,457), net P&L for November 2007 of ($10,812) this draw-down occurred prior to a major trend reversal from up to down


Full recovery to a net new high January 2008

October 2008 Intra-month draw-down ($11,187) with a net P&L for November 2008 of ($10,050) again this draw-down occurred prior to the major trend change from down to up.


Full recovery to a net new high November 2008

Although we’ve had two bad draw-downs this year I have confidence in the S&P Collar ATA and believe it will recover to a net new high within the next 4 to 12 weeks.

I do have two main concerns

1) Contract valuation relative to draw-downs and profit cycles

2) Is this trend change for real? Will the Economic fundamentals back it up? Or is this just another false reversal like the one we saw in February 2018?

Contact valuation relative to draw-downs and profit cycles

During the 2007 draw-down ($12,457) the value of an S&P contact was $77,450, during the 2008 draw-down ($11,187) contract value $48,400.

In 2018 the contract value is $136,600. My concern is with a larger contact value we could potentially see larger draw-downs (and profit cycles).  Example 2018 contract value is 76.37% larger than 2007, in theory because this program uses a percentage of the contact value for risk control and profit objectives the previous worst case draw-down could potentially increase by 76.37% from ($12,457) to ($21,970).   At the same time the average profit per year could also increase from $27,473 to $48,930. Larger draw-downs do not mean a program is failing as long as they are accompanied by larger profit cycles and the average profit per year relative to the maximum draw-down ratio remains intact.

I have experienced larger draw-downs & profit cycles due to increased contract valuation before trading a WTI Crude Oil program.

WTI Crude Oil went from $15,000 per contract in 1994, to $78,000 in 2007, then $147,270 in 2008, then back down to $113,930 in 2011. During 1994-2011 both the draw-downs and profit cycles increased proportionately to contract valuation.

Average profit per year relative to maximum draw-down remained at a ratio of 2.3 to 1.

Crude oil 20 year chart

I believe the same scenario could occur in the S&P and we should be prepared for the current draw-down to increase from ($12,457) to potentially ($18,000). It may not occur but with a contact value of $136,600 versus $77,450 a higher draw-down is a definite possibility.

If this potential increase in draw-down is unacceptable for your risk tolerance I suggest downshifting to a program that trades markets with more consistent contact valuations like currencies, for example the EUR-CHF or the Short Term FX Directional 

I believe currencies will trend and overall contract valuations will continue to be more consistent than in any other sector. All major Central Banks have acknowledged they will continue to devalue their currencies relative to tangible assets like gold, energy, real estate, shares and agricultural markets. None have an inflation target of 0.00%.

FX Analysis & Quotes Chart Defined Trend Overall Composite
Euro-FX Down Sell
British Pound Down Sell
Japanese Yen Down Hold
Australian Dollar Up Sell
Candian Dollar Down Sell
Swiss Franc Down Sell
USD Index Up Buy
Chinese Renminbi Down Sell

Why 2018 seems like such a difficult year.

From 2009 through 2017 the S&P was one of the easiest markets I’ve traded  in my 25+ year career, trends don’t get much better than below.


Technically the longest bull market in history has ended, we’ve seen sideways volatility coupled with higher contract valuations which has generated higher than normal loses during this major trend change.


The good news is the long-term trend has clearly reversed from up to down


The overall average, short-term, medium-term and long-term indicators  are all confirming the trend reversal.

Current Indicators

If this trend reversal is real we should see carry through and an accelerated move to the downside generating a substantial profit cycle similar to what we experienced in 2013, 2014 and 2015.

My second concern:

Are economic fundamentals and related market price action in agreement with the current major trend reversal in the S&P from up to down?

According to Fed Chair Powell the economy is robust, on track and to expect 5 more 0.25% rate hikes by December 2020.

1) Highlights from the last Fed press conference (5:00)

16+ trillion in the face value of open interest rate derivatives positions tells us a completely different story, this 16 trillion has gone from pricing in 0.84% of the Fed’s expected 1.25% rate  hikes in 2013 to just 0.34% currently.


During the period from December 2019 to December 2020 the market has gone from pricing in 0.34% of the Fed’s expected 0.25% to 0.50% in rates hike to a decrease in rates of 0.02%. Translated the interest rate market is telling us to  expect a sharp sell off in stocks and a potential recession in 2019.


Federal Reserve Vice Chairman Richard Clarida made statements consistent with what the market is pricing in contrary  to Fed chair Powell’s statements See this CNBC report

Vice chair Clarida’s statements on Friday the 16th of November motivated a hard sell off in the US dollar


And a further decrease in rate hike expectations Friday from 0.38% down to 0.34%. This month alone the market’s expectations for rate hikes between November 2018 and December 2020 have dropped from 0.53% on the 8th of November to 0.34% on the 16th of November versus the Fed’s expectations of an increase of 1.25% by December 2020. Again the interest rate market is pricing in a sharp decline in stocks and potential recession in 2019.


The curve is also narrowing

1997-2018 Chart

A narrowing curve is consistent with every major sell off in stocks over the last 20 years.

1997-2018 S&P Chart

Gold’s trend is reversing from down to up indicating flight to safety.Gold also has been a costly market for the long-term Gold ATA as this trend materializes.


Crude is selling off


I also believe all the good news has been priced into the US stock market and anything but better than expected economic reports will cause a sell off in US shares.

Bear and bull markets are a fact of life and I believe the one currently on deck could dwarf  anything we’ve seen to date, I’m just hoping it fully engages before I have to trade though periods like the current draw-down or the one we saw in February.

Major/Minor Bull, Bear markets 1983 to 2018

1983-2018 chart
January 1983 – August 1987 Bull 139.72 – 337.89 =+141.83%
August 1987 – October 1987 Bear 337.89 – 216.47 =-35.93%
August 1987 – August 1989 Bear to recovery (2 years)
August 1987 – July 1990 Bull 216.47 – 369.78 = +70.82%
July 1990 October 1990 Correction 369.78 – 294.51 =-20.36%
July 1990 – February 1991 Correction to recovery (7 months)
October 1990 – July 1998 Bull 294.51 – 1,190.58 =+304.26%
July 1998 – October 1998 Correction 1,190.58 – 923.52 =-22.43%
July 1998 – November 1998 Correction to recovery (4 months)
October 1998 – March 2000 Bull 923.52 – 1,552.87 =+68.15%
March 2000 October 2002 Bear 1,52.87 – 768.63 =-50.50%
March 2000 December 2007 Bear to recovery (7 years 9 months)
October 2002 – October 2007 Bull 768.63 – 1,576.09 =+105.05%
October 2007 – March 2009 Bear 1,576.09 – 666.79 =-57.68%
October 2007- April 2013 Bear to recovery (5 years 6 months)
March 2009 – October 2018 Bull 666.79 – 2,872.87 = +330.87%

If you can tolerate the risk I’d stay with the program if not I would down shift  to the EUR-CHF or the Short Term FX Directional

If you have questions send a message or contact me.

Peter Knight Advisor


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