In 2019 the U.S. has the worst credit rating in it’s history (lowered August 2011) and has to sell near record amounts of their debt offering the yield and highest instrument & currency risk in history
Technically the US equity market is still in a fragile long-term uptrend, history, current S&P price action, interest rates, deteriorating US economic fundamentals and common sense are all telling us this fragile uptrend is unsustainable.
Historically, markets fall faster than they rise giving us the opportunity when the nest bear market to make more in a shorter period of time than the last 3 bear markets combined.
Matching priced in rate expectations with S&P price action
17 August 1987 the S&P was trading at 334.11
Technically the short-term trend had been long since the 3rd of June 1987 at 293.47 when S&P price price action moved above the exponential moving average 9 (EMA9 red line) and the EMA9 above the exponential moving average 18 (EMA18 blue line), there were no violations of the up-trend though 17 August 1987
17 August 1987 4+ trillion in interest rate derivatives was pricing in 1.60% in rate hikes both the S&P and rate expectations were telling us the US economy was strong.
25th of August 1987 the S&P put in its high at 337.80
Technically the short-term trend had remained long since the 3rd of June 1987 at 293.47, price action remained above the exponential moving average 9 EMA9 (red line) and the EMA9 had remained above the exponential moving average 18 EMA18 (blue line) from 3 June through 25 August 1987
25th of August 1987 4+ trillion in interest rate derivatives was pricing in 1.50% in rate hikes -0.10% less than on the 17th of August 1987, telling us the economy was strong but not as strong as the prior week.
13th of October 1987 the S&P had fallen -23.28 points (-6.89%) to 314.52.
Technically; the market had reversed to short on the 7th of October 1987 at 318.52, price action was now below the EMA9 (red line) and the EMA9 was below the EMA18 (blue line)
13th of October 1987 4+ trillion in derivatives positions was now pricing in only a 1.07% hike, -0.43% less than on 17 August 1987 both the S&P and rate expectations were telling us US economic growth had stalled and was starting to slide quickly.
20th of October 1987 (1 week latter) the S&P had sold off a total of -35.90% to 216.50 and didn’t see a new high until July 1989.
Technically the short-term trend that kicked in at 318.52 and was never violated, price action had remained below the EMA9 (red line) and the EMA9 remained below the EMA18 (blue line) until the 17th of December 1987 were the short-term trend reversed to long at 242.98, with price action moving above the EMA9, the EMA9 moving above the EMA18.
21st of June 1999 the S&P was trading at 1,390.00 it was rattled but has survived the October 1997 mini crash (-9.174% in the wake of the Asian financial crisis) and the -22.44% “correction” from July through October 1998.
Technically the market had been is a medium-term uptrend since the 26th of October, price 1,098.67, weekly price action had moved above the EMA9 (using weekly data) and the EMA9 had moved above the EMA19.
21st of June 1999 6+ trillion in derivatives positions was pricing in a 0.3600% rate hike telling us the US economy & market were strengthening but a a slower place and that it remained skeptical because of the mini crash of -9.17% and the correction of -22.44%.
24th of March 2000 the S&P hits it’s high of 1,552.80
Technically the market had been in a medium-term uptrend since 26th of October 1998 at 1,098.67 when price action moved above the EMA9 and the EMA9 moved above the EMA18 with only questionable 1 week period during the year were the medium-term long would have stopped out was the 11th of October at 1,301.65 then re-entered long at 1,362.93 on 18 October 1999 when price action returned above the EMA9 and the EMA9 returned above the EMA18.
24th of March 2000, 6+ trillion in interest rate derivatives on the same day as the record high was now pricing in only a 0.0450% rate hike, –03150%. less than in October 1999 telling us during this 9 month period that US economic growth had slowed.
7 months latter on 23th of October 2000 the S&P had fallen -157.02 points (-10.11%) to 1,395.78.
Technically the S&P had been in a medium-term downtrend and short since the 2nd of October 2000 at 1,408.99 when price action moved below the EMA9 and the EMA9 had moved below the EMA18.
23th of October 2000 6+ trillion in interest rate derivatives on the same day was now pricing in a 0.2000% rate cut, this move from an expected rate hike of 0.0450% to a rate cut of 0.2000% told us the US economy was no longer strengthening, but weakening and weakening at an accelerated rate.
Less than 2 months latter on the 11th of December 2000 the S&P had fallen a total of -172.60 points from it’s high 0f 1,552.80 (-11.11%) to 1,380.20
Technically the S&P had been in a medium-term downtrend and short since the 2nd of October 2000 at 1,408.99 when price action moved below the EMA9 and the EMA9 had moved below the EMA18.
11th of December 2000 6+ trillion in rate derivatives positions on the same day was now pricing in another -0.20% rate cut, for a total rate cut of -0.425%, telling us a recession and bear market were engaging.
By October 2002 the S&P was trading at 768.65 down -50.50% from it’s March 2000 high,
Technically, the medium-term trend stayed intact since the 2nd of October 2000 at 1,408.99 when price action went below the EMA9 and the EMA9 moved below the EMA18 with no bonafide violations until it reversed to long on the 28th of April 2003 at 930.08 when price action went above the EMA9 and the EMA9 moved above the EMA18.
It took the S&P 13.5 years, from March 2000 to September 2013 to put in a significant new high. This should be reason alone to trade both long and short.
21th of August 2007, the S&P was trading at S&P 1,450.50.
Technically the market had been in a medium-term uptrend since 26th of October 1998 at 1,098.67 when price action moved above the EMA9 and the EMA9 moved above the EMA18
10+ trillion in interest rate derivatives was pricing in a 0.20% rate hike telling us the US economy was expanding but at a slow rate.
11th of October 2007 (less than two months latter) the S&P put in a new high at 1,576.10 however 10+ trillion in rate derivatives was now pricing in a rate cut of 0.2150%, the change from pricing in a rate hike 20 August 2007 to a rate cut 11 October 2007 told us the US economy had quickly gone from strengthening to accelerating weakness.
15th of November 2007 (a little over 1 month latter) the S&P had sold off 103.45 points (-6.05%) to 1,472.65, during this same period 10+ trillion in interest rate derivatives had priced in an additional 0.5500% in rate cuts bringing the total to 0.7700% telling us a bear market was engaging and a recession was eminent.
By March 2009 the S&P had sold off 57.70%. and we didn’t see a significant new high until March 2014.
5th of December 2016, S&P 2,200.65, 17+ trillion in rate derivatives pricing in a 0.4350% rate hike telling us the US economy was healthy.
21st of September 2018 the S&P hit a high of 2,940.90, 17+ trillion in interest rate derivatives pricing in only a 0.1750% rate hike (0.26% less than in December 2016) telling us the US economy was showing signs of weakness.
26th of December 2018 the S&P had sold off 594.30 points to 2346.60 (-20.21%) 17+ trillion in interest rate derivatives positions was now pricing in a 0.1500% rate cut telling us US economic growth had stalled and the economy was now weakening.
12th of July 2019 the S&P again traded at a new high 3,013.93, up +667.32 points or +22.14% from it’s December 2018 low however 17+ trillion in interest rate derivatives was now pricing in rate cut greater than 0.70% telling us the US economy is weakening, a bear market and recession are eminent.
An expected rate cut of greater than 0.70% coupled with the violent (but very tradable) price action we’ve seen over the last 2 years historically tells us a tenacious bear market is on deck and to prepare, but it may not go down like this in 2019 (no pun intended)
As the US faces this bear market their recessionary war-chest is near empty, the only remaining weapon to cauterize the next financial hemorrhage is quantitative easing (QE) and then, they only 12 rounds left in their 20 round clip.
The Fed spent the first 8 rounds by creating 4+ trillion USD backed by absolutely nothing (QE) to buy bad bank debt and US Treasuries at non competitive rates that the free market wouldn’t touch, they still have 3.8+ trillion of this putrid paper on their books.
The Fed knows (or should know) if they create more than 6 trillion USD in the next recessionary battle the USD will collapse. It will be replaced by the currencies of countries that have better fundamentals, balance sheets or any of 11 that countries that have a higher credit rating, failing that gold or other tangible assets as the monetary instrument of choice.
One has to remember the US no longer represents 46.07% of Global GDP, it’s now 24.18% at best, other sources put it as low as 16.94%
|% of Global GDP
2019 might not be like every other bear market since 1929 but historically the odds of it not being are about as good as bipartisan cooperation in Washington DC and a balanced Federal budget in 2020.
Either way I think all traders should be prepared for a continuation of the rally or to capture what historically should be a very hard sell off, I am and I hope this report will help you as well.
Why is 2019 different than 1987, 2000 and 2007 and what has this market been the most resilient in history.
Current valuations leave most traders baffled that the market has held up this high, this this long, but it’s a new world in 2019 economic fundamentals, trading capabilities and knowledge are radically different now than going into the any other bear market in history.
The biggest anomalies, online trading capabilities offering instant execution to institutional and retail investors alike (going to be interesting to see how this pans out during the next crash) and historic difference in risk/reward ratios of owning US Treasuries versus owning US Stocks.
Lets do the math
Stock valuations are based on the company’s tangible assets, their products, services, market share, their competition, income, debt, dividends and the the credibility of those who run the company. Although many of these “assets” are intangible they do produce tangible valuation that is ultimately determined by the free market. The company’s board has one unified objective, to protect and enhance the value of the company, if they don’t they’re broke and out of a job.
Stocks unlike US Treasuries yielding 2.00% have unlimited upside potential if rates go down there are stocks that will suffer, others that will benefit, if rates rise the same. If you do your homework this creates trading opportunities even for the long only crowd, they can shop around and position in quality stocks some that have dividends rivaling 10 year Treasury yields. For those that short and/or trade any of the 10 major Global Stock Indies fundamental changes in the economy create tremendous opportunity the bigger the change the bigger the opportunity.
Stocks, unlike US Treasuries who’s valuation is anchored to USD and it’s buying power will be impacted by reckless Federal spending and eventual dollar devaluation but they are a quasi-tangible asset, an entity that actually produces something, run by people who have a common objective, corporate profitability.
When the dollar devalues stocks like all other tangible assets will increase in USD price protecting wealth and/or minimizing damage. The true value (as determined by buying power) of a US Treasury is anchored to the USD, USD devaluation will depreciate the true value of all fixed income “assets” including US Treasuries against all tangible assets like gold, real estate and yes even stocks. With US Federal debt increasing by over 6,000% since 1987, the Fed’s only tool going into the next recession it’s ability to create money from nothing (quantitative easing), escalating reckless Federal spending and the US “adjusting” their economic releases to hide the reality of their reprehensible fiscal conduct I wouldn’t be surprised to see the USD get the long overdue devaluation character builder it so fundamentally deserves. For the long only crowd given the decision between USD or a tangible asset it should be a pretty easy for them to decide on the tangible asset.
1985-2019 S&P chart each 1.00 = $50.00
US Treasuries as alternative to stocks in 2019
If you purchase a 10 Year Treasury with a 5.00% yield and rates go down to 1.97% the liquidating value of the Treasury will increase to $127,281.75, the change in value is to price in the change in yield from 5.00% to 1.97% in this case for the 10 year duration, that’s where we were at 18 July 2019 at 1.97% with the 10 year trading at 127 9/32nds
1983-2019 US 10 year Treasury each 1-00 = $1,000.00
Treasuries unlike stocks have a ceiling on their appreciation, this level would represent a reasonable negative yield for example -1.00%, in other words you’d be paying the US Government 1.00% to hold your money while you took all the instrument and currency risk for this guaranteed loss of -1.00%, add in reported inflation and it quickly goes above -3.00%, actual inflation close to -5.00%. No responsible money manager could fulfill his fiduciary obligations to his clientele if they placed their clients in an position like this, at the very least he would lose any clients of his that had more than 1 functioning brain cell.
At a 2.00% yield with reported inflation at 2.44%, actual inflation greater then 4.00% it’s not much better, In 2019 10 Year Treasury investors have a post inflation loss of at least -0.44% to over -2.00% while they assume the instrument and currency risk of holding a 10 year US Treasury.
Upside, if the economy crashes and rates go to -1.00% (were currently at an all time historic lows) the 10 Year’s price would appreciate from the current $126,948 to $163,440, + $36,492 or +28.74% but the US would be in a depression and inevitably the population including Treasury investors would be depressed which wouldn’t be offset by a 28.74% return.
I doubt we’ll see economic recovery that would justify 10 year rates at 9.00% where they were in 1987 with reported inflation at 3.58% giving investors a real rate of return of 5.42%. in 1987 total Federal debt was 2.34 trillion (5.20 trillion in 2019 USD)
Let’s put the rosy colored glasses on and assume the 2019 US economy gets as good as it was the year of the 1987 stock market crash, interest rates returned to 9.00% enabling those who depend on fixed interest income to start buying wet dog food to eat instead of the dry, who knows, with that kind of income rolling in California retirees might be able to move out of their tents and into an apartment and have bathrooms with running water? (see this link it’s no joke)
Valuation impact on a 10 Year Treasury, current yield = 2.00%
To the 1987 per-crash level of 9.00%.
At 2.00%, value = $126,948
At 9.00%, value = $74,330
Dollar Loss = -$52,618
Percent loss = -41.44%
To 7.44%, their 40 year average (1968-2008) Fed data linked here
At 2.00%, value = $126,948
At their 40 year average of 7.44%, value = $83,210
Dollar Loss = -$43,738
Percent loss = –34.45%
USD Currency Risk
If the US dollar’s value returned to where it was trading in January 2007 you would lose an additional -13.77%.
$126,948 purchase price
-$43,738 instrument loss if rates returned to their 40 year average
$83,210 post instrument loss valuation
-11,460 currency loss should the USD return to where it was in 2007
$71,750 Liquidation value
-$55.198 total loss or -43.48%
2000, same scenario, average Treasury yield 6.43%, reported inflation 3.37%, Treasuries made sense in 2000 with real rate of return was 3.06%. Yield, real rate of return, potential instrument appreciation offset currency risk.
2007, same scenario, Treasury yields averaged 4.80%, reported inflation 1.93%, Treasuries made sense with real rate of return of 2.97%. Yield, real rate of return, potential instrument appreciation offset currency risk.
Leading up to every bear market investors had a viable alternative to stocks.
Since 2008 when they US government discovered and they could get away with having their unaudited Private Central Bank create trillions of dollars, backed by nothing, (Quantitative Easing) to buy US Treasuries, force rates down and save trillions in debt service cost this defensive alternative has been stripped from institutional traders and individual investors alike, the US has pushed yields to the lowest level in history for the longest period in history.
2008-20018 = lowest rates in history for the longest period of time in history
Imagine yourself as a long only professional trader
You manage people’s futures and retirements through pension funds, could you with a clear conscience place their funds in long-term US Treasuries, backed buy no tangible asset, trusting your client’s futures to the US Government’s fiscal management, their deteriorating credibility, in a market that trades like this for 2.00% return, with every potential $1.00 in profit you might make for them has $20.00 is objectively qualified risk anchored to it?
Would you trade this with $20.00+ dollars at risk for every $1.00 in potential profit and the upside is capped?
1983-2019 US 10 year Treasury each 1-00 = $1,000.00
Or would you trade this market?
Stocks unlike US Treasuries yielding 2.00% have unlimited upside potential if rates go down there are stocks that will suffer, others that will benefit, if rates rise the same. If you do your homework this creates trading opportunities even for the long only crowd, they can shop around and position themselves in quality stocks some with dividends rivaling 10 year Treasury yields. For those that short and/or trade any of the 10 major Global Stock Indies fundamental changes in the economy create tremendous opportunity, the bigger the change the bigger the opportunity.
Unlimited upside, manageable downside, far cleaner trend.
1985-2019 S&P chart each 1.00 = $50.00
You just answered the question as to what’s been holding this market this high for this long
Do you think Foreign buyers of US Treasuries are going to add to the 6.4 trillion in US Treasuries they already own with instrument & current risk greater than 40% in the short-term maybe, long-term definitely not.
A more realistic scenario would be if it became common knowledge the US had been misrepresenting it’s budget deficits to it’s citizens and Treasury investors for decades to give the appearance of being a more credible borrower for example, it was discovered the reported deficit for 2018 of a 779.14 billion was actually 1.256 trillion 447.48 billion higher than the official release. If this was common knowledge the US’s creditably as a borrow would erode and just like an overbought market run up by false facts that crashes US credibility as a borrower would fall just as fast, forcing the US to report it’s deficits accurately and penalized for its misrepresentations by having to pay a higher borrowing cost
and came it at . Or something as simple as the US “adjusting” their inflation downward to justify low Treasury rates enabling them to contain their debt service cost defrauding Treasury investors out of a fair yield, lower reported inflation also contains all US Government expenses tied directly to the Government’s official inflation rate such as Social Security recipients again defrauding these aging retirees of a portion of their retirement benefits something they had been forced to pay into their entire lives. Events like this would put US’s credibility as a borrower into a free fall forcing those to reassess the their investments in US Treasuries.
|Year||Total Federal Debt||Increase or decrease||Reported Deficit||Discrepancy|
The last 3 bear markets sell off to full recovery
in 1987, 10 year Treasuries were yielding over 9.00%, 3 month over 8.00%, reported inflation 3.58%. In 1987 Treasuries made sense, they had a real rate of return in excess of 4.42% (real rate of return = the Treasury rate minus reported inflation), When rates go down Treasuries rally in price.
Fund managers, long only traders, and the conservative trading crowd had a viable alternative to stocks where they could make not only a real rate of return in excess of 4.42% but potential instrument appreciation should the stock market crash creating a flight to perceived “quality” and a rally in Treasury prices as rates fell.
In 19987 let’s assume you thought the S&P was overvalued, you sold your stocks and bought a 10 year $100,000 Treasury, Immediately you would have had a 4.42% return above reported inflation with potential upside bond appreciation.
If rates went down because of a stock market crash a 10 year Treasury goes up in price to reflect the decrease in rates, example, if 10 year rates went from where they were in 1987 at 9.00% to where they are now at 2.00% your $100,000, 9.00% Treasury would increase in price to $162,880 to price in this decrease in rates, forward you’d earn 2.00%on the liquidating value of your Treasury of $162,880.
2019 Treasury yields are averaging 2.14%, reported inflation is 2.44%, investing in Treasuries in 2019 no longer makes sense, they have a negative rate of return of 0.30% with annual currency and instrument risk 5 to 20 times greater than yield (depends on duration). Let’s assume it is discovered that the US Government isn’t reporting its budget deficits correctly, in fact in 2018 the actual Federal deficit was 1.256 trillion, 477.480 billion higher than the reported 779.140 billion.
US credibility sinks to new lows, the entire US debt market starts aggressively selling off, rates start to rise quickly, selling of 6.4 trillion of Foreign owned US Treasuries engages, banks start to hemorrhaging and USD free falling
Potential instrument risk for $100,000 US Treasury with a taxable yield of 2.00% if rates returned to 1987 levels of 9.00%
At 9.00% your instrument loss on the $100,000 Treasury Treasury be$44,920, your liquidation value $55,080.
I’m exaggerating the risk to make a point, I realize the US would never allow 10 year rates to rise to 1987 levels of 9.00% when total Federal debt was 2.345 trillion and the US could afford to pay a Treasury investors a competitive rate with a positive rate off return.
If rates did return to 1987 levels of 9.00% US debt service cost would consume 1.931 trillion annually of 3.316 trillion in total US annual revenue or 58.24%, this would leave the US with 1.384 trillion in total revenue to run & defend the country and to fulfill their obligations to Social Security beneficiaries that paid mandatory payroll taxes their entire lives to ensure some of their minimal needs were meet during retirement.
30 Year Treasury risk, if 30 year rates return to levels they were at in 2007 a 30 year Treasury’s liquidating value would drop by 30%.
Looking at the chart below the only way to make any serious money long is if 30 Treasury rates went negative.
Heavy Treasury selling will engage, the Fed will again fire up the quantitative easing printing press creating enough money to buy enough Treasuries to cauterize the hemorrhage.
Prices will continue to deteriorate, rates will continue to rise, the primary primary reason being dollar devaluation (caused by the creation of and deteriorating US credibility as the Fed continues to buy US debt, this will add the the 4.2 trillion they created on the last round to buy over 2 trillion in bad bank loans no one else would touch and the 2 trillion in US Treasuries at non competitive rate as they reduced interest rates.
Before you call me crazy, answer this question, from 1968 through 2018 reported US budget deficits totaled 13.76 trillion but the national debt increased by 21.12 trillion, where did the other 7.36 trillion in debt come from?
Answer: “Off Budget Expenditures” Off-budget is the revenue and spending of certain federal entities that are exempt from the normal budget process such as Social Security & the United States Postal Service, in short because politicians don’t get an opportunity to vote on them they don’t count when the US budget reports its budget deficit or surplus but they are a least reflected in the national debt.
It would be like you walking into a bank, asking for a 30 year fixed loan at 2.59% (the current 30 year Treasury rate) or 2.66% below the current prime rate of 5.25%. Telling the loan officer you have lost money 45 out of the last 50 years, your personal debt has increased by 3,733.10% but if you count the bills you had to pay like your mortgage it’s a little worse and comes in 6,022%.
Flabbergasted with your sheer arrogance he politely tells you “that you don’t qualify to borrow money for 30 years at the nearly the lowest rate in history, you tell him “you did it the last 50 years” He tells you “sorry Mr. America you have zero ability to pay what you currently owe, rather than trying to get your fiscal house in order your fiscal irresponsibility has deteriorated exponentially, it’s no deal this time round please leave the bank”. You respond by saying, “YEA! why do you think I’m here, if I was fiscally responsible, making money and had the ability to pay off my debt I would need to borrow money from your bank sparky”. You go on to say, “I don’t need you I have a quantitative easing printing press in my Fed garage and I can make all the money I want, whenever I want, I know it works because I’ve made over 4 trillion with it already”. As bank security escorts you off the property the loan officer logs in starts selling all the loans (US Treasuries) Mr. America has with the bank, to whoever will buy them, at any price.
|Year||Total Federal Debt||Increase or decrease||Reported Deficit||Discrepancy|
The last 3 bear markets sell off to full recovery
1987-1989, high August 1987 337.80, low October 1987 216.50, total sell off -35.90%, recovery to new high July 1989 346.10, sell off to recovery 1.9 years.
2000 – 2007, high March 2000 1,552.90, low October 2002 768.65, total sell off -50.50%, recovery to new July 2007 S&P price 1,555.90, 7.3 years.
2007 – 2013, high October 2007 1,576.10, low March 2009 666.80, total sell off -57.70%, recovery to new high April 2013 S&P price 1,597.60, 5.5 years.
2000 – 2013, When the market sold off from it’s March 2000 high of 1576.10 it didn’t see a significant new high until March 2014 1,884.00, 14 years.
Fundamentals 1987, 2000, 2007 to 2019
1987, total Federal debt was 2.34 trillion, 42.22% of the US population was employed, annual personal income $16,313, Fed debt per taxpayer $22,974. Fed debt per per taxpayer was 1.41 times greater than annual income.
1987 Debt to GDP = 48.55%
10 year Treasuries were yielding over 9.00%, 3 month rates over 8.00%, reported inflation was 3.58%, real rate of return greater than 4.42%
In late 1985 and early 1986, the US economy shifted from a rapid recovery out of the early 80s recession to a slower expansion, resulting in a brief “soft landing” period. The stock market advanced and the S&P 500 peaked on the 25th of August 1987 at 337.89.
OPEC collapses in early 1986 and the price of crude oil falls more than 50%. The middle east starts tuning up it tanks and putting in it’s ordinance orders in, China was having a special on anti-ship silkworm missiles at 1.2 million a piece perfect for punching holes in tankers, Iraq is a big buyer.
In the 1980’s regulation, taxation & unionization forced many US companies to relocate to more cost effective manufacturing environments, US wealth and more importantly jobs left the US. US trade deficits soared, concerns escalated that this loss of US wealth and jobs could put the US economy and financial markets at risk.
In 1987 efforts to limit trade advantages by Asian countries stoked controversy, from 1977 to 1987 ownership of US debt by Non US investors had soared 230% from 85 billion to 280 billion USD, large Treasury investors were worried that Pacific Rim countries would respond to anti-trade policies (such as tariffs), by not purchasing and/or potentially selling US debt.
These fears were put to rest by politicians, bankers and brokers, perpetually reiterating that these countries would not kill the golden goose and be happy to continue buying US debt using money generated by their trade surpluses with the US, US Treasuries made sense for these Foreign investors, the USD was stable paying over 8.00%, reported US inflation less than 5.00%.
Please note in 1987 the US hadn’t discovered (or maybe had the conscience not to use) “Quantitative Easing” (Quantitative Easing is the Fed’s creation of trillions of USD backed by nothing to buy trillions in debt no one else will for example, the 2+ trillion in bad bank loans and 2+ in Treasuries at non competitive rates during the last recession that free market investors wouldn’t touch).
By October 1987 4+ Trillion of USD in interest rate derivatives had gone from pricing in a 1.60% rate hike to just a 1.07% confirming the US economy was slowing.
8th October 1987 the market’s price action was tired, we were seeing sharp breaks and sluggish recovery, after the last sharp break the S&P failed to put in a new high in a reasonable amount of time, technical liquidation of long positions engaged, net new shorts were established,
Technically on the 8th both price action and the EMA9 (red line on the chart below) dropped below the EMA18 (blue line) generating a net new short position at 314.17
Thursday 15 October 1987 The US has the worst trade deficit in history coming in at 15.26 billion (33.90 billion in 2019 dollars) the market panicked, igniting another round of heavy selling. I’d like to point out in July 2019 The US Trade deficit was 55.5 billion up from 50.80 billion in June in the last two months over 100 billion in wealth has left the United States, Since this report was released in October 1987 over 15.21 trillion.
Thursday 15 October 1987 The U.S. House of Representatives passed a bill that eliminated what they called “government-funded corporate takeovers” by removing deductibles (purchases that can reduce the amount of tax debt such as interest payments) when large company tries to buy the majority of stock in a smaller company making these purchases less attractive. These large “takeover” purchases had supported the market and fueled it higher were now gone.
Thursday 15 October 1987 equity markets continued to decline attributed
Thursday 15 October 1987 Persian Gulf, Ali Khamenei (“Supreme Leader”of Iran at the time) finally gets the Silkworm missile set he ordered from China (remember this is before Amazon) and he’s anxious to play with it, he fires one off and hits the American-owned (and Liberian-flagged) supertanker, the Sungari, off Kuwait’s main Mina Al Ahmadi oil port. Ali and the other grease jockeys are hoping this will bump oil up from $20.00 to $25.00 a barrel as he really needed the money. It had a rough decade for Ali, most of his “commission income” came from the Iranian oil and arms industries and he was down to his last 32 billion, first the Egyptian-Israeli peace treaty in 1979 jeopardized his arms revenue, then he gets shot in 1981 paralyzing his right arm and trigger finger, denied superpower status in the Persian Gulf, the war with Iraq was winding down and oil at $20.00 a barrel he could barley make any money after he paid the smugglers to get it out of the country and onto the free market. He was stressed out, worse he couldn’t even have a stiff drink to chill out.
Friday, 16 October 1987, Ali and the grease jockeys disappointed that the missile hitting the super tanker Sungari only rallied crude oil $0.47 a barrel fired off another and hit the U.S.-flagged MV Sea Isle City, still no carry through in the oil market it, actually gave up some some ground because the sell off in global equities, these guys were just having a rough couple of years, now their Chinese made Silkworm missiles (that cost over a million a piece) punching holes in ships in the Persian Gulf can’t even rally crude a $1.00 a barrel? Time to call up the troops & terrorists and get ready for another war.
Friday, 16 October 1987 London markets unexpectedly closed due to the Great Storm of 1987,
Friday, 16 October 1987 When the United States opens retail liquidation of long potions (most program traders were already short on the 8th) aggressively began to engage, program traders added heavily to their existing short positions pressuring the market even lower, by the close the S&P had traded at 281.94 down 16.56% from it’s August high of 337.89. Treasury Secretary James Baker added fuel to the fire stating concerns about the rising value of the US dollar and falling stock prices, he sounded harsh, confused and blamed the stock market decline on overvaluations, the market closed and margin calls we’re generated telling customers to get out or pay up.
19 October 1987 (Black Monday)
While US & European retail retail investors were still sleeping forced margin call liquidation began to engage, huge institutional sell orders generated by pension and other funds hit, more huge orders from program traders adding heavily their existing short positions.
When Europe came in margin call and European fund liquidations, selling momentum accelerated exponentially when program traders added to their short positions in both the stock and especially the futures markets (futures has no up-tick rule)
By the time the US came in it was game over, there were no buyers to sell too, prices free fell with tenacity, every time the market closed (they take time outs) it would gap lower when reopened
19 October 1987 damage report, by the close the S&P had declined 20.45%, it was, and remains, the single biggest one day percentage decline in history. To put this decline into perspective the stock market crash of 28 October 1929 setting off the great depression was 12.82%. Until 19 October 1929 this sell off was the largest one day percentage decline and to the day remains the second largest.
What I believe is one of the main reasons for the crash
In 1987 all orders were done in the pits by open outcry,
Institutional Investors could “arb” their orders in over the phone, they’d call the arb desk on the exchange floor, the arb clerk would hand signal the order to the broker in the pit, the pit broker would fill the order and hand signal the fill back to the arb clerk on the desk, the clerk would report the fill to the institutional client was waiting on the line and good arb team could fill a market order and have it reported to the client in less than a minute.
Retail investors had to telephone their brokers, once the client got through to the broker the broker would write it up an order ticket & time-stamp it, then give that ticket to the branch’s order desk, the branch’s order desk would review it, re-write the order, then transmit or call the order to the the firm’s order desk on the floor, the firms floor desk would write it up again and give the order to a “runner” who brought the order to a deck holder who stood on the outside of the trading pit, the deck holders (one for buys orders another for sells), would organize the orders by price & time received, then feed the orders to the floor broker in that order, the floor broker would then hand signal and yell the order to any takers in the pit, once the order was executed the floor broker would write his badge number and the badge number of who he did the trade with, the size and price(s) on the ticket, the floor broker gave the ticket back to the deck holder, the deck holder to the runner (when the runner came around), the runner gave it to the firm’s desk on the floor, the floor desk log it then transmit it to the branch’s order desk, the branch’s desk would review & log it then tell the broker to pick his fill (written on he brokers original ticket), the broker would then finally telephone the client with his fill, such speed and efficiency this system is still partially in place, this whole process on an market order could take 15 to 45 minutes.
When the market crashed, floor brokers gave priority to size (regardless of what you’ve been told) At least that’s what I saw everyday I worked on the floor of the Chicago Mercantile Exchange including the 19th of October 1987. Institutional investors with size get filled, retail investors with odd lots & small positions didn’t it’s that simple. The Exchange would label it a “fast market” in a fast market many of the rules that protect traders don’t apply and it became everyone man for himself because we’re not going to see this kind of move anytime soon.
It’s this simple, sell orders out numbered the buys at least 10 to 1 on the 19th, for the sells trying to get out or go short their was nobody to take the other side of the trade, would you while it’s free falling? The market gaped lower until buys materialized from institutional traders covering their short positions.
Tuesday 20 October 1987, (the day after the crash) downward momentum stalled as institutional traders bought positions to offset their shorts. The positions they bought were sold to them mostly by panicked retail investors and/or from those forced to sell because they couldn’t meet their margin call(s)
17 December 1987 at 242.98 the market technically became a buy, both the price action and the EMA9 (red line) moved above the EMA18 (blue line) offsetting the net short position from 8 October 1987 at 314.17.
1988 it wasn’t as bad as expected, especially during the first half of the year, as the anticipated negative fallout from the October 1987 stock market collapse did not materialize. Economic output grew moderately, employment expanded, inflation ticked higher, the budget deficit increased by a modest 5.5 billion to 155.1 billion, personal income rose rose 7.15% and the national debt remained relatively constant at 2.60 trillion.
The US had “no emergency and temporary rate cuts”, no quantitative easing and savers actually maintained a very healthy positive rate of return throughout the brief recession and entire recovery. Take a look at those rates, people that worked and saved money their entire lives actually could live off their interest income.
August 1990 Iraq, President Saddam Hussein accused Kuwait of flooding the market with oil and driving down prices. As a result, on 2 August 1990, Iraqi forces invaded and conquered Kuwait. The UN immediately condemned the action, coalition forces led by the United States were sent to the Persian Gulf, Aerial bombing of Iraq commenced in January 1991, from the 24th of February to 28th of February 1991 UN forces drove the Iraqi army from Kuwait (four days). In the aftermath of the war, the Kurds in northern of Iraq and the Shiites in the south rose up in revolt and Saddam Hussein barely managed to hold onto power until the US invasion of 2003, from 1991 to 2003 Iraq much like Iran now had been cut off from much of the world.
Despite all the wars, per capita defense spending actually decreased.
|Year||Defense spending||+ or –||Per Capita||+ or –|
Maybe Treasury Sectary Baker was right? The market was just overvalued going into the 1987 crash and the US economy was fundamentally sound.
Unfortunately for the US, its citizens and future generations of Americans this wasn’t correct.
During the Economic recovery and the period that followed (what US politicians qualified as prosperity) the national debt soared from 2.6 trillion to 5.6 trillion up 115%. Personal income during the same period increased by only 63.89%, Federal debt per taxpayer escalated from $24,684, (1.41 time personal income) to $43,374, (1.51 times personal income) for an increase of 7.09%. In short Americans were making more in 1999 but had lower quality of life than 1988.
|Year||Total Federal Debt||Personal Income||Fed Debt Per Taxpayer||Debt to Income
what explains the 115% growth in debt while personal income increased by only 69.89%
In 1990 the Bureau of labor and Statistics (BLS.GOV) changed the way US inflation was calculated, in short they moved entirely away from a fixed basket of goods and services to calculate the rate to a floating basket of goods and services they chose at their discretion, They also implemented what they call “Hedonic Quality Adjustments” which allow them to adjust the price of anything in their discretionary based on their subjective interpretation for increases in quality. So from 1990 forward thet can adjust what’s in the basket and it’s price giving the BLS.GOV the power to adjust the inflation rate to whatever their boss the .GOV tells them to. With control of the inflation number they control of interest rates, debt service cost and every government expense who’s increase is tied to the “official inflation rate” Social Security is one.
2000, total Federal debt was 5.63 trillion, 46.79% of the US population was employed, annual personal income $30,640, Fed debt per taxpayer $42,632. Fed debt per per taxpayer was 1.39 times greater than annual income.
2000 Debt to GDP = 54.24%%
10 year Treasuries were yielding 5.74%, 3 month rates 6.11%, reported inflation 3.45%, real rate of return greater than 2.29%.
In the 1990’s regulation, taxation & unionization forced more US companies to relocate to more cost effective manufacturing environments, US wealth and more importantly jobs left the US, trade deficits soared to to 447 billion annually in 2000 up from 159 billion in 1987 contrary to any rational thinking concerns dissipated that this massive annual loss of US wealth and jobs could put the US economy and financial markets at risk.
In 2000, these fears were put to rest by politicians, bankers and brokers, perpetually reiterating that these countries would not kill the golden goose and be happy to continue buying US debt using money generated by their trade surpluses with the US, US Treasuries made sense, the USD was stable, 3 month rates were paying over 6.00%, with reported US inflation less than 3.45%. Treasuries owned by Foreign and International Investors has soared to a record 1.08 trillion up from just 279.5 billion. (this isn’t good) Please note in 2000 the US still hadn’t discovered (or maybe had the conscience not to use) “Quantitative Easing”
Predictions that the a bear market would engage emerged during the dot-com “bubble” in the late 1990’s stating with the October 27, 1997 mini-crash in the wake of the Asian Financial crisis. Technically, this market reversed from long to short on the 16th of October 1997 when both price action and the EMA9 (red line line) moved below the EMA18 (blue line)
This “mini crash” caused an uncertain economic climate during the first few months of 1998. However conditions improved and the Federal Reserve raised interest rates six times between June 1999 and May 2000 in an effort to cool the economy and achieve a soft landing.
17 February 2000, The Nasdaq composite index rallied 121.22 points, or 2.7 percent, to 4,548.87 surpassing its previous record close of 4,485.63 on 10 February, volume also set a record at 2 billion shares. Technically, price action was cleanly above the EMA9 (red line) the EMA9 was cleanly above the EMA18 (blue line) confirming the 29 October 1999 long at 2,637.44.
17 February 2000, 6+ trillion in interest rates derivatives positions was pricing in an increase in rates of 0.35% telling us that US economy and markets were healthy.
17 February 2000, the curve was positive, also telling us that US economy and markets were healthy.
24 March 2000 NASDAQ hits a intra-day all time record high of 4816.24 and closes at 4,691.61 as money managers snapped up the year’s best-performing technology stocks five sessions before the end of the first quarter (refereed to as window dressing). Technically, price action was cleanly above the EMA9 (red line) the EMA9, was cleanly above the EMA18 (blue line) confirming the
24 March 200 6+ trillion in interest rates derivatives positions was pricing in an increase in rates of only 0.15% 0.20% less than 17 February telling us the US economy and markets were slowing down.
24 March 2000, Washington; Federal Investigators launch a probe into White House E-mails, the lost e-mails consist of all electronic messages sent from outside to White House employees from August 1996 to November 1998 — a period that covers the Democratic funny-money probe and the Sexgate scandal that led to President Clinton’s impeachment.
24 March 200 AMB. Peter Van Walsum Chair Iraq War Sanctions, testifies before the United Nations that A Russian tanker, the Volgana (ph), loaded with Iraqi oil, was seized. But many other vessels sneak through the Gulf with the help of Iran. The oil-laden ships can hug territorial coastlines of Iran and escape the multinational forces (mostly US) which, by law, must remain in international waters. Iran gets a percentage of the smuggled oil sale for the service as do the smugglers, with Iraq pocketing the rest.
The burst of the stock market bubble occurred in the form of the NASDAQ crash in March 2000.
2007 Annual personal income $39,801, total Federal debt per taxpayer $64,863 or Federal debt per taxpayer was 1.63 times larger than annual income.
2019 annual personal income $53,658, total Federal debt per taxpayer $143,980 or Federal debt per taxpayer is 2.68 times larger than annual personal income,
The 1.73 trillion the Fed bought in bad bank debt during the last
Most longs decided on liquidation and taking the 8.32%+ in time deposits. Very aggressive selling began in Far Eastern markets Monday morning(Asia) 19 October and accelerated by the time London was up and trading, largely because London had closed early on October 16 due to the storm. By 9:30 a.m (London), the London FTSE100 had fallen over 136 points. Later that morning, two U.S. warships shelled an Iranian oil platform in the Persian Gulf in response to Iran’s Silkworm missile attack on the Sea Isle City, selling accelerated, by the close on 19 October the S&P had lost more than 35% of its value the majority of on the 19th of October 1987.
Alan Greenspan was on an airplane to Dallas on ‘Black Monday’ when the stock market began to plummet. On arrival he made a few phone calls, and early the next day the Fed issued a statement;
‘The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.’
It followed up that statement with substantial open market purchases over the next days and weeks. I.e. it created more money. And Fed officials began a round of telephone calls to banks, reminding them they were in the business of lending that money.
Two cost effective instruments to capture both the up & down trends
E-Mini S&P (ES) 1.00 change in price = $50.00
Contract value at 3,000.00 = $150,000.00
Total bid ask spreads and all fees per trade = $25.00 or less
Margin Requirement = $6,300 USD
Margin cost = pay 0.75% annually on longs, get paid 0.75% on shorts
Restrictions on shorting = None
Trading hours = 23.5 hours per day, Sunday afternoon – Friday afternoon
Daily USD volume = 168.5 billion
S&P Micro (MES) 1.00 change in price = $5.00
Contract value at 3,000.00 = $15,000.00
Total bid ask spreads and all fees per trade = $12.00 or less
Micro Margin Requirement = $630 USD
Margin cost = pay 0.75% annually on longs, get paid 0.75% on shorts
Restrictions on shorting = None
Trading hours = 23.5 hours per day, Sunday afternoon – Friday afternoon
Daily USD volume = 2.9 billion
One simple trading method to capture the remaining move higher and the inevitable larger move lower.
Platform set up
- Create a separate profile for the ESU19 (S&P E-Mini) or MESU19 (Micro)
- Set your display to candlestick using 1 minute price data
- Add in these exponential moving averages (EMAs) EMA4.5, EMA9 and EMA18, if 4.5 is unavailable use 5.
- Create 8 more charts using the same EMA4.5, EMA9 and EMA18.
- Set each of the 9 charts for a different time period in this example I’ve set the first chart to 1 minute, the second 5 minutes, then 15, 30, hourly, 4 hour, daily, weekly and monthly.
One glance at my ESU19 profile page and I can I can identify the S&P’s momentum, trend and monitor any trend change as it occurs.
Simplified Trading Procedure
Pick any time period(s) to trade from 1 minute to monthly, use the same rules for all time periods traded.
If price action is above the EMA9 and the EMA9 is above the EMA18 = long.
Risk on long positions, if the EMA9 moves below the EMA18 exit longs.
If price action is below the EMA9 and the EMA9 is below the EMA19 = short.
Risk on short positions, if the EMA9 moves above the EMA18 exit shorts.
The EMA4.5 crossing the EMA9 warns you to get prepared to modify your position.
The longer the time period traded (1, 5, 15, 30 minute, hourly, 4 hour, daily, weekly or monthly) the greater the risk and reward per trade.
To track this this procedure today use the charts linked below all are updated every 10 minutes.
In these examples I’m going to trade using this procedure on 120 minute, daily, weekly an d monthly price bars, the only difference is the time period I’m feeding the exponential moving averages, 120 minute, daily weekly or monthly.
To track trades using 120 minute price bars, use this chart and follow the rules above using 120 minute price bars.
To track trades using daily bars use this chart, follow the rules above using daily price bars.
To track trades using weekly price bars, click on this chart, follow the rules above using weekly price bars and see where we reverse our weekly long position (established 11 February 2019).
Monthly, click on this chart, follow the rules above and see where the current October 2010 long reverses to short using the monthly.
June 2010 – January 2018 presented no challenge, it was hard not to be profitable. The monthly EMA9 stayed cleanly above the monthly EMA18 for the entire period as a trend trader if you weren’t profitable in this market during this period you may want to keep your day job.
Let’s do the trade-by-trade using the 4.5, 9 and 18 EMAs for all four periods reviewed above 120 minute, daily, weekly & monthly.
Let’s use January 2018 through July 2019 during this period we’ve had confused top heavy price action, nasty breaks, then reversals, up and down trends and no significant overall rate of change (the market is up less than 4.00% during this 18 months)
Performance Summary January 2018 – June 2019 (18 months
In this example I’m trading all four time periods simultaneously using the the same 4.5, 9 & 18 EMA’s reviewed above, the same rules for all four, the only difference is the data period I’m feeding the EMA’s (120 minute, daily, weekly & monthly) no stops, no filters nothing just a simple clean reversal when the EMA9 crosses the EMA18.
Performance is based on trading one contact, per time period, per trade maximum number of positions at any given time during the 18 months 4.
I’m deducting $38.90 per trade per contact to cover all bid/ask spreads and fees including automated order entry placement and 24 hour a day monitoring. If I spent 24 hours a day 5.5 days a week glued to my quote machine I could have enhanced performance by $2,400.00 to $172,229.10 but my time is worth more than 23 cents an hour so I opt to pay my broker in Chicago to place and monitor trades for me, guarantee order accuracy and maximum account risk (called a maintenance balance) defined if the account should ever have a drawdown of $30,000 all positions would be liquidated on or before the next close, if he fails to liquidate he’s liable imagine it as a stop based on your liquidating value.
Net profit = $169,829.10
Maximum drawdown = $23,158.90
Drawdown period 26 March 2018 – 6 July 2018
Total number of trades = 180
Average winning trade = $2,565.57
Average losing trade = $819.64
Percent winning trades = 41.67%
Percent losing trades = 58.33%
Maximum margin requirement = $25,200 (cell D17 on the spreadsheet)
Closed out trades = $138,430.50 (cell D13 & shown on the spreadsheet chart)
Open trade equity (28 June) = $31,398.60 (cell D15)
Starting balance 2 January 2018 = $100,000.00 (cell D3)
Ending balance 28 June 2019 = $269,829.10 (cell D17)
Trade-by-trade performance = vertical column M
Spreadsheet download , open it & enable editing.
Performance verification will get you comfortable with the EMA crossovers and help you build the confidence you’ll need to tolerate drawdowns and maintain discipline.
Performance verification using this spreadsheet is as easy as matching the trade date/price in vertical column E to date/price to the charts linked in vertical column B. Net cumulative trade-by-trade performance shows in vertical column M.
Example, cell E23 shows a trade taken for the 120 minute EMAs on 2 January 2018 at 2690.75, cell B23 links the chart 02-Jan-18, match the price in cell E23, to the EMA9 EMA18 crossover on the chart linked in cell B23.
I’ve set up the spreadsheet so you can change
Number of contacts traded for any period (120, daily, weekly or monthly)
Contact size (S&P E-Mini $50.00 per 1.00 or S&P Micro $5.00 per 1.00),
Total trade cost (bid/ask spread & all fees)
I’ve kept it simple to give you one simple effective trading methodology that will capture up and down trends in the S&P. You can use this EMA trading method on nearly any market, any time from 30 seconds to monthly, see this link for access to over 100 EMA analysis pages.
Obviously you can step up performance trading additional EMA time periods, and confirming trend using these indicators and/or implement risk control strategies like collars, collars objectively define risk on every trade and for the duration of every trading period. For the performance of 15 programs that use fully disclosed enhanced EMA analysis see this link.
If you’re going to trade EMAs with a broker make sure they have automated trading capability, that they’ll guarantee order placement accuracy and allow you to place a maintenance balance on your account. A maintenance balance is a stop based on the liquidating value of your account should it drop to a per-defined level for example, initial start balance $100,000, maintenance balance of $70,000, should the account fall from $100,000 to $70,000 all positions would be liquidated on or before the next settlement or the broker would be liable.
If you’re going to trade on your own get organized
Delete all the old platform profiles you don’t use, when the bear market fully engages every second will count, do an analysis page for each market your trading.
Example trading 9 different time periods on the S&P using the 4.5, 9 & 18 EMAs, in this example once glance and you can see that 5, (1 minute to hourly) are generating short trades, 4 (4 hour to monthly) are long, trading all 9 at the same time you’d be long 4, short 5, leaving net short only 1 contract, if you work this right it will automatically lighten up your position during trend changes and take aggressive potions when the trend is clean and they all agree.
When trading multiple markets long, short and “on deck”if you’re trading with filters create a separate profile for each sector and a sub for each time period traded example,
On the 5th of July I was trading 47 different currencies using the daily EMA with filters, I’ve separated out the 35 shorts on the left (highlighted in red), the 12 longs upper right (highlighted in green), and the 6 on deck lower right (highlighted in yellow). In seconds I can check positions versus my run and confirm, I have the correct positions on (long, short or flat) and position size is correct.
To take it a step further you can also create separate profiles for markets traded in a specific sector by volatility and perceived risk, this is one of my slower stock allocations, all sleepers, again using the 4.5, 9 and 18 EMAs on daily data,
Out of the 28 longs 6 are misbehaving, (yellow) but not enough to hit their objective liquidation levels, 22 are behaving, 3 shorts that are doing well (red) 5 more (blue) that are on deck that I’m waiting on to write option credit spreads against. Using multiple profiles you’ll have that information for whatever sector, time period or market instantley.
Always have an eject button, even if your trading a limited number of markets, have eject button in place this will enable you to liquidate all positions in that sector instantly, hopefully you’ll never need it but it’s nice to know it’s there.
Who knows what could happen to trigger a massive selloff?
Let’s assume that the Global Stock Index market is heavily leveraged, with trillions of USD dollar volume occurring daily, much of it automated trading, (formerly refereed to as program trading) The market is stalling with each new high taking longer and harder to achieve, trillions more in interest rate derivatives positions are also pricing is a pessimistic outlook for the economy and the market it spooked, similar to what we saw in 1987, 2000, 2007 and so far in 2019.
Trading the daily EMA4.5, EMA9 and EMA18 it generated a short at 314.17 the 8th of October and reversed to long at 242.81 on the 16th of December 1987
You have to ask yourself how the US Federal debt went up ___________________ when the reported federal budget deficits during the same period totaled _________?
6) 1968-2007 +2.47% Treasury rate above BLS.GOV reported inflation
Average 3 month, 5 & 10 years Treasury rates from 1968 through 2008 (40 years) were 2.47% above reported BLS.GOV inflation providing Treasury investors an average pre tax real rate of return of +2.47%.
7) 2008-2019 0.00% Treasury rate above reported inflation
Average Treasury rates from 2008 through 2018 (10 years) were 0.00% above reported BLS.GOV inflation and 1.67% below actual inflation providing Treasury investors an average pre tax real rate of return of 0.00%if you give the reported inflation number credibility and a negative 1.67% if you believe inflation is higher than represented. Treasury returns are pretax translated a 2.00% rate with BLS.GOV reported inflation at 2.00% becomes a negative rate of return of at least 0.66%, using actual inflation 2.33%. 0.66% on the current national debt of $21,462,300,000,000 = $141,651,180,000 at 2.33% = $500.071,290,000. To put this into proper perspective total Federal revenue all sources in 2018 was
US Federal debt, debt service cost, Average rate.
Foreign owned Treasuries
With U.S. Treasuries and U.S dollar near record highs 6+ trillion in foreign owned debt may start to unwind.
If the dollar turns lower
And U.S debt is at or near record highs where risk outweighs reward 5 to 1
Would you hold it?
6) Identifying the downturn as it occurs
7) No stimulus amo left with the exception of Quantitative easing (Fed creating money backed by nothing) then using that money to buy US Treasuries and other debt no one else will at the offered rate.
7) One trading method that captured the the majority of all major market moves in the S&P from 2000 through 2019.
S&P program here
13) Try this procedure and watch it work on any of the Global Stock Index Futures, individual Stocks or CFDs (contract for difference) below using any time period and these rules.
13.1) Pick a time frame to work with H=Hourly, to M=Monthly
13.2) If price action is above the red line and the red is above the blue = long.
13.3) For longs, the O=Opinion must greater than a 29% buy.
13.4) Risk on longs, if the red line moves below the blue exit the trade.
13.5) If price action is below the red line and red is below blue = short.
13.6) For shorts, the O=Opinion must greater than a 29% sell.
13.7) Risk on shorts, if the red line moves above the blue exit the trade.
13.8) Same rules apply for all time periods hourly to monthly
Prices are updated every 10 minutes if you have questions send a message.
14) Or try it on any of the other markets we trade, updated every 10 minutes
|Link||Futures & Forex
||Top Gainers & Losers|
|14.01||Global Stock Indices (Futures)||Today to 1 Year|
|14.02||Currencies (Cash Market)||Today to 1 Year|
|14.03||Currencies (Futures)||Today to 1 Year|
|14.04||Metals Markets (Futures)||Today to 1 Year|
|14.05||Global Energy Markets (Futures)||Today to 1 Year|
|14.06||Global Interest Rates (Futures)||Today to 1 Year|
|14.07||Interest Rate Expectations Though 2027||Today to 1 Year|
|14.08||Hedge Funds & CTAs||Limited to QEPs|
||Top Gainers & Losers|
|14.09||Stock & Index CFDs||Today to 10 Year|
|14.10||All S&P 500 Stocks||Today to 1 Year|
|14.11||All NASDAQ 100 Stocks||Today to 1 Year|
|14.12||Top/Bottom Stocks all US Exchanges||Today to 10 Years|
|14.13||200 ETFs – Exchange Traded Funds||Today to 10 Years|
|14.14||Cannabis Stocks||Today to 1 Year|
The S&P’s price action, yield curve and market priced in rate expectations are all telling us the percentage decline during the next bear market could equal or exceed 1987, 2000 or 2007.
Let’s compare S&P price action 1987, 2000, 2007 to 2019.
1987 Choppy, top heavy price action, nasty corrections, struggles to make new highs, fails then collapses.
2000 Choppy, top heavy price action, nasty corrections, struggles to make new highs, fails, then collapses.
2007 Choppy top heavy price action, nasty corrections, struggles to make new a high, then collapses.
2019, Choppy, top heavy, nasty corrections without generating a significant new high in over a year.
2) Comparing the Yield Curve and real rate of returns, 1987, 2000, 2007 to 2019.
1987, The yield curve didn’t invert until 1988 but it was a very different world in 1987, 10 year Treasuries were yielding over 9.00%, 3 month over 8.00%, reported inflation 3.58%, total Federal debt was 2.34 trillion (5.20 trillion in 2019 USD).
In 1987 Treasuries made sense, they had a real rate of return in excess of 4.42% in short, the US’s credibility, economic fundamentals and balance sheet hadn’t gone to crap. (real rate of return = the Treasury rate minus reported inflation).
2000, The curve inverted in June 2000, the bear market fully engaged in October 2007, average Treasury yield was 6.43%, reported inflation 3.37%, total Federal debt 5.62 trillion (8.27 trillion in 2019 USD)
Over a decade of Governmental helter-skelter spending had taken it’s tool on the US’s balance sheet and credibility but Treasuries still made sense because they had a real rate of return of 3.06%.
2007, The curve inverted in January 2007, the bear market fully engaged in October 2007, Average Treasury yield 4.80%, reported inflation 1.93%, total Federal debt 8.95 trillion (10.97 trillion in 2019 USD)
Despite the fact Washington had become a total debt Junkie having to main-line trillions of dollars just to take the jones off Treasuries still made sense because they had a real rate of return of 2.97%.
2019, The curve inverted in January 2019, Treasury yields are averaging 2.44%, in 2018, reported inflation 2.44%, total Federal debt in 2019 22.51 trillion, (9.59 trillion in 1987 USD)
Investing 5 to 30 year US Treasuries in 2019 makes absolutely no sense they have a real rate of return using reported inflation of 0.00% and a negative rate of return using actual inflation of greater the 1.75%, annual currency and instrument risk is 5 to 20 times greater than annual yields.
3) The Market’s priced in rate expectations pre bear market 1987, 2000, 2007 versus 2019.
1987 on the 17th of August 1987 4+ trillion in open derivatives positions was pricing in 1.60% in rate hikes, the S&P was trading at 335.40. By the 13th of October 1987 they had decreased by 0.53% to just pricing in just 1.07% in hikes, on the 13th of October the the S&P was trading at 314.52, by the 20th of October 1987 the S&P had sold off a total of 35.90% to 216.50 and it didn’t didn’t see a new high until July 1989.
2000 in January 2000 the S&P was trading at 1,400.10, 8+ trillion in derivatives positions was pricing in 0.45% rate hikes, by December 2000 the S&P was trading at 1,335.10 down 4.71% with the 8+ trillion in derivatives now pricing in a 0.59% rate cut, by October 2002 the S&P had sold off 50.50% and didn’t see a significant new high until September 2013, 13.5 years latter.
2007 In September 2007 the S&P was trading at 1,545.50, 10+ trillion in open derivatives positions was pricing in a 0.2050% rate hike, by November 2007 the S&P had sold off to 1,406.25 down 9.01% with the 10+ trillion now pricing in a 0.77% rate cut, by March 2009 the S&P had sold off by –57.70%. and didn’t see a significant new high until September 2013.
2019 In October 2018 the S&P was trading at 2,944.75, 17+ trillion in open derivatives positions was pricing in a 0.2650% in rate hike, in June 2019 the S&P was trading at 2,969.25 with the 10+ trillion in rate derivatives pricing in a 0.79% rate cut.
Price action, rates & current economic fundamentals tell us when the next bear market engages it will be tenacious, what we have on deck.
High magnitude price moves without a significant new high in over a year, and Yield Curve, priced in interest rate expectations going from a 0.45% hike to a 0.77% cut, deteriorating US fiscal credibility as a borrower, and the US’s desperate attempt is massaging their economic releases on deficits, inflation and employment in attempt to make the US economy healthy and solvent to buyers of it’s debt to justify purchasing it with yields at historic lows and USD risk at or near record highs.
The US’s hyper-escalating debt, their ability to sell new debt on the open market (and not to the Fed), their ability to pay historically competitive rates on their existing and future debt issues. When you do the math if rates returned to their pre “Quantitative Easing” 1968-2007 average of 8.29% annual debt service cost would consume 1.87 trillion of the total 3.30 in the US’s annual Federal Revenue leaving just 1.43 trillion annually to pay all public obligations like Social Security, defend and run the country.
The US’s ability to manufacture and sell goods and services on the Global market to cauterize the their trade deficit hemorrhage, to put US trade deficits into proper perspective over the last 10 years 5.79 trillion in US wealth has left the United States through trade deficits for foreign shores. Social issues aside what better judge of a countries global competitiveness than their balance of trade?
The ability of the US to report it’s Federal budget deficits correctly and to balance the Federal budget, over the last 10 years US Federal debt has increased by 12.51 trillion USD while the reported budget deficits totaled 9.17 trillion. In short if politicians don’t get to vote on it it doesn’t count and labeled an “off budget expenditure” US politicians have been doing this for more than 50 years with reported deficits over the last 50 years being 13.76 trillion yet Federal debt increased by 21.12 trillion.
Their ability to fight off the next recession, in 2019 the US’s recessionary war-chest is near empty, the only remaining tool the US has left to cauterize the next recessionary/depressionary hemorrhage is “Quantitative Easing” or the creation of trillions of USD backed by nothing and this too is limited. since 2008 the Federal Reserve has already spent the first 8 rounds of their 20 round QE clip to fight off the last recession, they created over 4 trillion USD backed by nothing to buy bad bank debt and treasuries at not competitive rates the free market wouldn’t touch. As of July 2019 the Federal Reserve still has over 3.8 trillion of this putrid paper on their books. History has shown us this is the last resort of a terminal economy, that any country that has created massive amounts of money backed by nothing leads has experienced hyper-inflation and the eventual collapse of their currency & economy. In 2019 the US is no longer in the to big to fail category, US GDP no longer represents 46.07% of Global GDP, it’s now 24.18% at best, other sources put it as low as 16.94%.
Technically the US equity markets are still in a fragile long-term uptrend, history, US fundamentals and common sense are shouting at us that it’s unsustainable.
Regardless of what the academics or the newsletter crowd represent market price action is, more often than not, completely disengaged from true economic fundamentals, the price is determined by what the consensus of the free market believes it should be rather than it’s value determined by any rational intrinsic valuation model. News flash, the majority of traders lose money including the “accredited academics” holy grail over optimized system vendors and newsletter writers. Understandable as the majority of this crowd have never had to depend solely on their trading ability as their sole source of income, I have for nearly 30 years.
Sure there are times when its easy to be right and make money like the majority of equity traders did from July 2008 through August 2018 but most including professional Hedge Fund managers were out performed by the markets they were trading and this was with the majority of the price action we’ve seen easier to trade the than a 10 year old’s video game is to play.
The gentle clean trend and price action we saw from July 2008 through August 2018is an aberration certainly not the norm. One of the simplest technical trading tools would have kept you on the right side of the market for the entire period from July of 2008 through August 2018. During this period the S&P appreciated from 915.10 in July 2008, to 2,902.10 in August 2018 up 1,987.00 points or +217.13% giving these traders a compounded annual rate of return on the nominal value of their positions of approximately 12.23%, after inflation and taxes less than 7.00% equivalent to your instrument and currency risk for holding this position for less than 1 week.
Even with this type market the vast majority of hedge fund managers picked up only a fraction of the potential gains, I’m am truly baffled that trillions in equity in given to this arrogant crowd to manage, it’s beyond any rational explanation.
Is the Hedge Fund crew over dosing on their own egos? Their performance is a industry wide embarrassment.
No, this can’t be right, this crowd is supposed to be the best of the best, let’s check BarclaysHedge they have 5,988 Hedge Funds reporting, click here for the spreadsheet, it’s actually worse, only 11.69% of the 5988 reporting outperformed the market, with an average drawdown of 18.91%. Let’s check the last 12 months we had a 20% move to the downside and 20% to the up, bad again the average return is only 0.78%, how about this year, as of June the S&P is up over 15%, bad again only 14.88% did as well as the market with the average return coming in at 6.97%, just depressing.
Let’s see if we can outperform the majority of these mangers using a strategy you can learn in less than 15 minutes.
This simple tool captured the entire move from July 2008 through August 2018 uninterrupted, it’s a combination of 3 exponential moving averages (EMAs) using monthly price data. On the chart linked below the EMA4.5 is the green line, the EMA9 red, EMA18 blue.
Let’s look at the trading procedure in it’s entirety that captured the move,
If price action is above the EMA9 and the EMA9 is above the EMA18 you trade long, if price action is below the EMA9 and the EMA9 is below the EMA18 you trade short, no filters, no stops, just trade with the long-term trend all day everyday.
The EMA4.5 is nothing more than a warning, should the EMA4.5 cross the EMA18 to pay attention to your position and be prepared to adjust it if the EMA9 follows the EMA4.5 and crosses through the EMA18 as well. This assumes you have the 10 minutes a month to monitor the long-term trend and want to out perform 88.31% of all hedge fund managers on the planet who currently have trillions of USD under management.
It will be interesting to see how the Hedge Fund crew performs during a market that is trading “normal” according to historical standards and presents more challenge to trade than the gentle price action and clean trend we saw from July 2008 through August 2018. Below is the January 1995 though July 2009 S&P chart during this period hedge fund fatalities hit record percentage highs.
I’ve dropped it the long-term EMA4.5, EMA9 and EMA18, again If price action is above the EMA9 and the EMA9 is above the EMA18 you trade long, if price action is below the EMA9 and the EMA9 is below the EMA18 you trade short, no filters, no stops, just trade with the long-term trend all day everyday. During this period this simple toll out performed over 90% of the reporting hedge Funds.
unlike most objective trading strategies you can feed feed the EMA4.5, EMA9 and EMA18 nearly any time period ranging from 1 minute to monthly and they’ll perform on nearly any market. Lets rip through the last 40 years using the EMA4.5, EMA9 and EMA18 feeding them weekly price data.
15) Trading Programs to capture the moves on deck.
Peter Knight Advisor