RISK DISCLOSURE

Program availability is dependent on your country of residence and financial status,

Investors in any of our programs must be a Qualified Eligible Participant (QEP) as defined by rule 4.7 of the Commodity Exchange Act.

A US citizen who owns at least $2,000,000 of securities and other investments excluding their primary residence.

Have an open account with a futures commission merchant for at least six months, have at least $250,000 for commodity interest transactions and have a portfolio of those investments. Current regulations require a brokerage statement(s) no older than 3 months for verification.

Or

A Non US citizen providing a completed W-8BEN 4.7 non US acknowledgment, a current Passport or other Government ID and proof  of address (bank statement or utility bill). Minimum net worth must equal or exceed $500,000 USD or major currency equivalent, income equal to $100,000 USD, or major currency equivalent

All must fully understand and acknowledge the substantial risk trading in any market using leverage, Stocks, ETFs, Mutual Funds, Forex, Futures or CFDs. Any funds invested if lost should not have a significant impact on one’s lifestyle.

Bid/ask spreads, commission, clearing, exchange and regulatory fees will have an adverse impact on the net overall performance of  any account with any firm. Prior to making a decision to participate in any investment make sure you fully understand the fees associated with trading.

Examples of historic price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences.

The information provided in this report contains research, market commentary and trade recommendations. It should be known that the representatives of our firm may trade for their own accounts or those of others, due to various factors (such as margin requirements, risk factors, trading objectives, trading instructions, trading strategies and other factors) different from the opinions and recommendations found in this report.

Actual past performance is not necessarily indicative of future performance. No representation is being made that any account will or is likely to achieve future profits or losses similar to those shown.

Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is  likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.

Please contact us with any questions regarding the risk and reward of any program or market.

Privacy Notice

Watching the Bear Market Engage & Capturing It

Sections in this report

1)_Educational videos & resources on the instrument were trading
2) 1 July 1980  to 14 August 2019 EMA performance summary (using weekly)
3) Full disclosure of trading procedure
4) Verifying performance 1 July 1980 to 14 August 2019
5) Trading multiple time periods simultaneously 120, daily, weekly & monthly
6) Allocation strategy for trading multiple time periods
7) Links & instructions to track trades forward as they occur
8) Other ATAs traded, links to their performance, disclosure of  methodology
9) Creating your own ATA portfolio using any ATAs & leverage of your choice

2019 = Opportunity

Volatility and Bear markets are nothing new, traders like myself look forward to them.

Although I always trade with the trend up or down my profit/loss statements tell me over the last 25+ years bear markets generally have higher return on risk and make more in a shorter period of time. Looking at the chart below, I think you can appreciate the potential I see trading this market lower.

1983 through 2019 chart

1) Educational videos & resources on the in instrument traded

1.01) What is an Equity Index Futures?
1.02)
About S&P Futures and Contract Specifications?
1.03) Definition of Margin?
1.04)
The Benefits of Futures Margins?
1.05)
Fundamentals and Equity Index Futures
1.06)
Who Uses Equity Index Products?
1.07)
Why Trade Futures Instead of ETFs?
1.08) Futures Educational Videos & Resources

2) One proven solution to capture the move

The ATA trading methodology disclosed in this report is easy to understand, implement, captured the majority of every major up and down trend since 1980, outperformed the market and the majority of  ETF’s and  Hedge Funds we track.

Performance Summary 1 July 1980 through 14 August 2019

2.01) Performance is calculated trading one S&P E-Mini (ES) 1.00 = $50.00  from 1 July 1980 through 14 August 2019, never adding positions, assuming worst case order execution and deducting a ridiculously high $100.00 per round-turn trade to cover any bid/ask spreads, order execution issues, clearing and regulatory cost. For those just venturing into the world of trading ATAs there is a micro contact 1/10th the size of an E-Mini see S&P Micro (MES) 1.00 = $5.00.

Performance Summary  From 1 July 1980  to 14 August 2019
Start Date 28-Jul-1980 S&P 1980 – 2019 2,251.88%
End Date 31-Jul-2019 Net No leverage 3497.28%
Net Gain $211,200.50 Net 2 to 1 leverage 6,994.55%
Max-Draw -$13,973.00 Net 3 to 1 leverage 10,491.83%
Winning % 62.50% Net 4 to 1 leverage 13,989.10%
AVG Winner $11,164.11 S&P E-Mini (ES) 1.00 = $50.00
Losing % 37.50% S&P Micro (MES) 1.00  $5.00
AVG Loser -$1,814.71 Index Educational Videos & Resources
– Per Trade $100.00 Message me with any questions

You can set this program up as an Automated Trading Account (ATA) using the S&P E-Mini (ES) 1.00 = $50.00 or the S&P Micro (MES) 1.00  = $5.00.  for the performance of other ATAs see this page.

3) Trading Procedure

Longs
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 and reverse to short.

Shorts
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 and reverse to long.

The EMA4.5 crossing the EMA9 and EMA18 is a wake up call warning you to get prepared to modify your position should the EMA9 cross the EMA18.

There are no secret filters, no stops, no holy grail algorithms and you don’t require a direct line to Fed Reserve chair Powell to trade this.

4) Qualifying this procedure over the last 39 years in less than 5 minutes

To make performance verification easy I’ve divided the last 39 years into 13, 3 year periods, circled all trades and linked all charts for with trade date & price, entries & reversals enabling to easily verify performance. If you’d like to use the spreadsheet rather than the links below download it here open and enable editing, some operating systems may require you to save it as a new file.

Procedure, EMA9 above EMA18 = long,  EMA9 below EMA18 = short, that’s it, clean and easy to verify, cumulative performance is on your right.

Period 1  July 1980 – July 1983

Date & Chart L or S Price Value Profit/Loss Cumulative
28-Jul-1980 Long 120.78 $6,039.00 $0.00
06-Jul-1981 Short 129.37 $6,467.50 $329.50 $329.50
06-Sep-1982 Long 120.97 $6,048.50 $320.00 $649.50

Period 2  July 1983 – July 1987

Date – Chart L or S Price Value Profit/Loss Cumulative
30-Jan-1984 Short 160.91 $8,045.50 $1,897.00 $2,546.50
14-Jan-1985 Long 171.32 $8,566.00 -$620.50 $1,926.00
06-Oct-1986 Short 233.84 $11,692.00 $3,026.00 $4,952.00

Period 3 Chart July 1986 – July 1989  &  Daily here for 1987 crash

Date – Chart L or S Price Value Profit/Loss Cumulative
03-Nov-1986 Long 245.77 $12,288.50 -$696.50 $4,255.50
15-Oct-1987 Short 298.08 $14,904.00 $2,515.50 $6,771.00
06-Jun-1988 Long 266.45 $13,322.50 $1,481.50 $8,252.50

Period 4  July 1989 -July 1992

Date – Chart L or S Price Value Profit/Loss Cumulative
15-Jan-1990 Short 339.93 $16,996.50 $3,574.00 $11,826.50
07-May-1990 Long 340.53 $17,026.50 -$130.00 $11,696.50
30-Jul-1990 Short 344.86 $17,243.00 $116.50 $11,813.00
14-Jan-1991 Long 332.23 $16,611.50 $531.50 $12,344.50
18-Nov-1991 Short 376.14 $18,807.00 $2,095.50 $14,440.00
23-Dec-1991 Long 387.05 $19,352.50 -$645.50 $13,794.50

Period 5  July 1992 -July 1995

Date – Chart L or S Price Value Profit/Loss Cumulative
28-Sep-1992 Short 414.27 $20,713.50 $1,261.00 $15,055.50
26-Oct-1992 Long 418.68 $20,934.00 -$320.50 $14,735.00
28-Mar-1994 Short 460.58 $23,029.00 $1,995.00 $16,730.00
01-Aug-1994 Long 458.28 $22,914.00 $15.00 $16,745.00
21-Nov-1994 Short 461.69 $23,084.50 $70.50 $16,815.50
16-Jan-1995 Long 464.78 $23,239.00 -$254.50 $16,561.00

Period 6  July 1995 – July 1998 The EMA9 never crossed below the EMA18, the long was maintained during this 3 year year period.

Period 7  July 1998 – July 2000

Date – Chart L or S Price Value Profit/Loss Cumulative
03-Aug-1998 Short 1089.45 $54,472.50 $31,133.50 $47,694.50
26-Oct-1998 Long 1070.67 $53,533.50 $839.00 $48,533.50
27-Sep-1999 Short 1282.81 $64,140.50 $10,607.00 $59,140.50
25-Oct-1999 Long 1362.93 $68,146.50 -$4,106.00 $55,034.50

Period 8 July 2000 – July 2003

Date – Chart L or S Price Value Profit/Loss Cumulative
25-Sep-2000 Short 1450.30 $72,515.00 $4,268.50 $59,303.00
24-Dec-2001 Long 1161.02 $58,051.00 $14,364.00 $73,667.00
28-Jan-2002 Short 1122.20 $56,110.00 -$2,041.00 $71,626.00
04-Mar-2002 Long 1164.31 $58,215.50 -$2,205.50 $69,420.50
15-Apr-2002 Short 1125.17 $56,258.50 -$2,057.00 $67,363.50
28-Apr-2003 Long 930.08 $46,504.00 $9,654.50 $77,018.00

Period 9 July 2003 – July 2006

Date – Chart L or S Price Value Profit/Loss Cumulative
12-Jul-2004 Short 1101.39 $55,069.50 $8,465.50 $85,483.50
06-Sep-2004 Long 1123.92 $56,196.00 -$1,226.50 $84,257.00
18-Apr-2005 Short 1152.12 $57,606.00 $1,310.00 $85,567.00
23-May-2005 Long 1189.28 $59,464.00 -$1,958.00 $83,609.00
10-Oct-2005 Short 1186.57 $59,328.50 -$235.50 $83,373.50
31-Oct-2005 Long 1220.14 $61,007.00 -$1,778.50 $81,595.00
05-Jun-2006 Short 1252.30 $62,615.00 $1,508.00 $83,103.00

Period 10 June 2006 – July 2009

Date – Chart L or S Price Value Profit/Loss Cumulative
21-Aug-2006 Long 1295.09 $64,754.50 -$2,239.50 $80,863.50
30-Jul-2007 Short 1458.93 $72,946.50 $8,092.00 $91,195.00
17-Sep-2007 Long 1484.24 $74,212.00 -$1,365.50 $89,829.50
05-Nov-2007 Short 1453.53 $72,676.50 -$1,635.50 $88,194.00
04-May-2009 Long 879.21 $43,960.50 $28,616.00 $116,810.00

Period 11 July 2009 – July 2012

Date – Chart L or S Price Value Profit/Loss Cumulative
17-May-2010 Short 1136.52 $56,826.00 $12,765.50 $129,575.50
06-Sep-2010 Long 1109.25 $55,462.50 $1,263.50 $130,839.00
01-Aug-2011 Short 1286.94 $64,347.00 $8,784.50 $139,623.50
17-Oct-2011 Long 1224.47 $61,223.50 $3,023.50 $142,647.00
14-May-2012 Short 1351.93 $67,596.50 $6,273.00 $148,920.00
02-Jul-2012 Long 1362.33 $68,116.50 -$620.00 $148,300.00

Period 12 July 2012 – July 2015 The EMA9 never crossed below the EMA18, maintained the long for this 3 year year period.

Period 13 July 2015 – Current

Date – Chart L or S Price Value Profit/Loss Cumulative
17-Aug-2015 Short 1970.89 $98,544.50 $30,328.00 $178,628.00
12-Oct-2015 Long 2033.11 $101,655.50 -$3,211.00 $175,417.00
04-Jan-2016 Short 1922.03 $96,101.50 -$5,654.00 $169,763.00
07-Mar-2016 Long 2022.19 $101,109.50 -$5,108.00 $164,655.00
08-Oct-2018 Short 2767.13 $138,356.50 $37,147.00 $201,802.00
04-Feb-2019 Long 2707.88 $135,394.00 $2,862.50 $204,664.50
23-Jul-2019 Settle 2951.90 $147,595.00 $12,101.00 $216,765.50

5) Trading multiple time periods simultaneously

In this example I’m trading the same EMA4.5, EMA9 and EMA18 on 4 different  time periods, 120 minute, daily, weekly and monthly simultaneously over an 18 month period.

I’ve deducted $38.90 per round-turn trade to cover all bid/ask spreads, clearing, and regulatory fees including automated order entry and 24 hour a day position monitoring. Using an ATA I’m paying the brokerage team in Chicago to place and monitor all trades for me, guarantee order accuracy and maximum account risk (called a maintenance balance) defined in writing before the first trade goes on.

6) Performance

Linked Here is a spreadsheet containing the trade-by-trade performance, I’ve  linked all charts with entry, offsets, dates & prices enabling easy performance verification, download, open and enable editing (with some operating systems you may have to save it as a new file)

On the spreadsheet you can change the number of contracts traded for each time period in cells B5, B7, B9 & B11. To change the staring balance see cell D3, contract size cell B3, use $50.00 a point for trading the S&P E-Mini (ES) or $5.00 a point for S&P Micro (MES) , to modify the Bid/Ask spread and all fees deducted per trade change cell B13 to $39.80 for the S&P E-Mini (ES) or $12.95 for the S&P Micro (MES), margin requirement, cell B15, use $6,300 for S&P E-Mini (ES) or $630 for S&P Micro (MES).

Performance below is based on trading one E-Mini S&P (ES) contract for each time period, 120 Minute, Daily, Weekly and Monthly.

Performance dates from 1 January 2018 to 14 August 2019

Net profit = $163,147.10
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 (shown in cell D17)
Closed out trades = $140,798.40 (shown in cell D13)
Open trade equity (14 August) = $23,348.60 (cell D15)
Starting balance 2 January 2018 = $100,000.00 (cell D3)
Ending balance 28 June 2019 = $263,147.00 (cell D17)
Trade-by-trade performance = vertical column M

Linked Here is the spreadsheet containing the trade-by-trade performance and all links for performance verification.

7) To track this procedure forward

Follow procedure reviewed in section 3, use the same procedure for all 4 time periods, EMA’s are already dropped into to charts, charts are updated every 10 minutes enabling you to track trades for the period(s) of your choice as they occur.

Using 120 minute price bars this chart
Daily price bars this chart
Weekly this chart
Monthly this chart

When all 4 periods generate a short you’ve just confirmed the beginning of the next bear market, 119 years of price history tells us we won’t see a new significant high for a minimum of 2 years up to 13.5 years.

Obviously you can enhance performance using additional indicators for trend confirmation like the ones linked here, trading additional time periods simultaneously and/or implementing strategies like collars that define risk on every trade and for the duration of every trading period. I did this spreadsheet a few years back on collars and dropped in an instructional video into the spreadsheet on how to set up a collar, experiment with different collar strategies and time periods.

8) Here’s a line up of  some of the more basic programs that use enhanced EMA strategy.

All trade with the trend long or short using fully disclosed trading methodology. Message me with a date, time, contact details and I’ll walk you through any of them, when we’re done you’ll be able to duplicate trades and performance.

Link ATA Mini-mum Start Date Average Per Year Maximum Drawdown 2019
8.01 GSI-NC 250K 2011 63.31% 22.46% 35.73%
8.02 FX-C 100K 2007 75.82% -25.07% 12.14%
8.03 GE-F 50K 2014 104.43% -31.27% 122.82%
8.04 CFD-NC 50K 2015 94.31% -33.99% 72.66%
8.05 FX-C 2X 50K 2007 151.63% -50.14% 24.32%
8.06 S&P-NC 35K 2011 98.83% -54.45% 78.13%
8.07 GC-NC 30K 2009 105.27% -39.68% 148.63%
8.08 LS-R 30K 2015 84.09% -47.39% 9.71%
8.09 GC-C 25K 2005 105.18% -49.10% 106.14%
8.10 FX-NC 25K 2012 96.30% -51.89% 68.34%
8.11 S&P-C 25K 2007 113.28% -49.83% 65.06%
8.12 WFX-NC 25K 2010 103.15% -48.77% 15.75%
8.13 FX-CA 25K 2007 128.93% -54.85% 13.06%
8.14 SPM-NC 12.5K 2011 92.23% -53.31% 59.83%
8.15 LSR -M 10K 2015 89.78% -47.36% 27.63%
8.16 WFX-ST 7.5K 2016 118.09% -66.08% 31.57%

Automated Trading Accounts enable you to trade any combination of programs automatically with overall account risk defined before the first trade goes on.

9)  See this link  to create your own portfolio using any combination of   programs.

10) Controlling Overall Account Risk

Initial Balance = Starting Amount
Maintenance Balance = Account balance if hit all positions are liquidated.
Video Defining Overall Account Risk.

When I trade these programs I like to define the overall account risk before the first trade goes on, should the program fail I’m out, as the program makes money I move the maintenance balance higher to lock in gains in the event the program fails in the future. I’ll stay with the program as long as it performs and my maintenance balance isn’t violated. I’ve come to the point where I look at these programs as if they were one trade with a stop loss based on account valuation to cauterize any potential financial hemorrhage enabling me to survive and trade another day, for more on initial and maintenance balances see this link.

11) If you’re going to track your ATA or trade this strategy on your own get organized.

Set up your platform by sector, in the example below one glance at the EMA 4.5,9,18 Index profile page gives me all the information I need to track the 9 Stock Indices I’m in trading using these EMAs on 5 different time periods per Index.

List your market symbols alphabetically left to right, time periods traded vertically shortest to longest in descending order, this enables you to sort trades alphabetically & time, look at the charts and knock out ATA trade and position confirmations quickly.

You should be able to fit up to 9 markets across, 5 time periods deep.

When your trading 5+ time periods in 45+ markets, set up different profile pages using the exact same format for each, in this example FX1, FX2, FX3, FX4, FX5.

One glance at each the FX profile page tells me the direction for each market, each time period and which markets have the cleanest trends to trade allowing me to check my positions quickly and confirm the ATA team is doing their job correctly.

FX2

FX3

FX4

FX5

Once you get the hang of it you can go though 45 different markets trading 5 time periods in each in less than 5 minutes.

When your trading, Indices, Currencies, Energies, Interest Rates, Individual Stocks, ETFs and CFD’s using multiple time periods its easy to have several hundred positions on in multiple accounts at once, it’s imperative to stay organized and always have a one click eject button in place enabling immediate liquidation of all positions and/or to cancel all open orders. Have another for every sector, one for each program and one for all positions in a given market, you’ll probably never use them but it’s nice to know they’re there if things get quick & nasty.

11) Be prepared for volatility

There is a very big difference in order execution capabilities in 2019 versus all other bear markets in history, internet speed and computer capability are literally 10 times faster in 2019 than 2007, in 2019 order execution is 100’s of times faster, we’ve gone from flip phones and open outcry on the Exchange floor to online order execution in nano seconds in 2019.

5 February 2018 chart using 10 minute bars

Going to be a fun year packed with major market moves in just about every sector.

12) Analysis pages & quick links for every major Stock Index, updated every 10 minutes.

# Analysis Page Hour 2 Hour Day Week
Trend
12.01 S&P 500 H 2H D W T
12.02 NASDAQ H 2H D W T
12.03 Dow H 2H D W T
12.04 Russell 2000 H 2H D W T
12.05 Euro Stoxx 50 H 2H D W T
12.06 Euro Stoxx E600 H 2H D W T
12.07 DAX Index H 2H D W T
12.08 CAC 40 H 2H D W T
12.09 Swiss Index H 2H D W T
12.10 Hang Seng H 2H D W T
12.11 Nikkei H 2H D W T
12.12 ASX 200 Index H 2H D W T
12.13 FTSE 100 H 2H D W T

13) Analysis pages for Currencies, Metals, Energies, Rates, CFDs, Individual Stocks & ETFs, updated every 10 minutes.

14) Services we provide, rankings reports and asset allocation software we use.

15) Educational videos & resources

15.01 Futures General Information
15.02 Options General Information
15.03 Currency Futures
15.04 Stock Index Futures
15.05 Interest Rate Futures
15.06 Metals Futures
15.07 Energy Futures
15.08 CME Learning Center
15.09 Futures Fundamentals
15.10 Education Material
15.11 Resource Center
15.12 Research Reports
15.13 Podcasts
15.14 Monthly FX Review
15.15 Media Room

16) Account minimums USD or major currency equivalent

Futures & Forex ATAs, $7,500 to $100,000 (open to all investors)
Stocks & ETF ATAs, $100,000 to $2,500,000 (open to all investors)
CTA & Hedge Funds $250,000 to $10,000,000 (Must be a QEP)
How To Open An Account

If you have questions send a message or contact me anytime.

Regards,
Peter Knight Advisor
Asset Investment Management

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Privacy Notice

Risk Disclosure     Defining Overall ATA Account Risk

Global Stock Indices – No Collar

Performance may 2011 – July 2019

Stock Indices Traded    Stock Index Educational Videos & Resources

Recommended Starting Balance $250,000.00
Cumulative Net Profit
$1,292,535.06
Maximum Drawdown (-22.46%)
($56,150.76)
Best Year 2017 +84.42% $211,062.39
Worst Year 2016 +37.24% $93,107.63
2007-2019 Average +63.31% $158,269.60
2019 +35.73%
$89,333.16

Performance is based on trading one $250,000 unit, never adding units and withdrawing all net profits annually. This program uses leverage, has a realistic risk factor of $75,000 USD per unit, if you are not in a position to comfortably assume this risk you should not participate in this program.

Risk Disclosure       Defining Overall Account Risk

Send a message with a date, time and contact details and I’ll review this program with you enabling you to duplicate trades and verify performance

What this program Trades

All the Global Stock Index Futures On This Page
Stock Index Educational Videos & Resources

Program Structure and Account Opening Procedure

Automated Trading Accounts (ATA)
The Fee Structure For This Program
Defining Overall Risk For Your Account

How Balances Are Guaranteed Plus or Minus Trading
Exchanges Traded

Brokerage Firms
How To Open An Account

If you have any questions send a message or contact me.

Regards,
Peter Knight

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Privacy Notice

Risk Disclosure

S&P Micro No Collars (Trades CFDs or MES Futures)

S&P Micro – No Collar August 2011 – July 2019

Contract Traded   Analysis Page  Educational Resources

Recommended Starting Balance $12,500.00
Cumulative Net Profit
$94,152.18
Maximum Drawdown (-53.31%)
($6,663.39)
Best Year 2017 +152.47% $19,058.95
Worst Year 2011 +12.61% $1,576.05
2007-2019 Average +92.23% $11,528.84
2019 +59.83%
$7,478.67

Performance is based on trading one $12,500 unit, never adding units and withdrawing all net profits annually. This program uses leverage, has a realistic risk factor of $ 8,500 USD per unit, if you are not in a position to comfortably assume this risk you should not participate in this program.

Risk Disclosure Defining Overall Account Risk

Send a message with a date, time and contact details and I’ll review this program with you enabling you to duplicate trades and verify performance

What we’re trading

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

Or we can trade S&P CFDs each 1.00 = $10.00
S&P CFD Margin = $1,250 USD

Analysis and Educational

S&P Analysis Page
Global Stock Index Analysis Homepage
Stock Index Educational Videos & Resources

Program Structure and Account Opening Procedure

Automated Trading Accounts (ATA)
The Fee Structure For This Program
Defining Overall Risk For Your Account

How Balances Are Guaranteed Plus or Minus Trading
Exchanges Traded

Brokerage Firms
How To Open An Account

If you have any questions send a message or contact me.

Regards,
Peter Knight

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Privacy Notice

Risk Disclosure

1987 2000 2007 to 2019 20190722

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.

1983 through 2019 chart

 

Matching priced in rate expectations with S&P price action

S&P 1987

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

Chart

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.

Chart

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

Chart

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.

Chart

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)

Chart

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.

Chart

2000 S&P chart

2000

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.

Chart

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%.

Chart

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.

Chart

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.

Chart

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.

Chart

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.

Chart

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.

Chart

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.

Chart

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.

Chart

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.

Chart

2007

2007 S&P chart

 

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.

Chart

2019 S&P Chart

 

2019

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)

Chart

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%

Ranking Country GDP
(millions USD)
% of Global GDP
1 United States $20,494,050 24.18%
2 European Union $18,750,052 22.13%
3 China[n 2] $13,407,398 15.82%
4 Japan $4,971,929 5.87%
5 Germany $4,000,386 4.72%
6 United Kingdom $2,828,644 3.34%
7 France $2,775,252 3.28%
8 India $2,716,746 3.21%
9 Italy $2,072,201 2.45%
10 Brazil $1,868,184 2.20%
11 Canada $1,711,387 2.02%
12 Russia[ $1,630,659 1.92%
13 Korea, South $1,619,424 1.91%
14 Spain $1,425,865 1.68%
15 Australia $1,418,275 1.67%
16 Mexico $1,223,359 1.44%
17 Indonesia $1,022,454 1.21%
18 Netherlands $912,899 1.08%
19 Saudi Arabia $782,483 0.92%
20 Turkey $766,428 0.90%

2

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%

Rate
Price Value Calculator
-1.00% 163.44 $163,440
-0.500% 156.54 $156,540
0.000% 150.00 $150,000
0.500% 143.79 $143,787
1.000% 137.89 $137,885
1.500% 132.28 $132,277
2.000% 126.95 $126,948
2.500% 121.88 $121,880
3.000% 117.06 $117,060
3.500% 112.47 $112,470
4.000% 108.11 $108,110
4.500% 103.96 $103,960
5.000% 100.00 $100,000
5.500% 96.23 $96,230
6.000% 92.64 $92,640
6.500% 89.22 $89,220
7.000% 85.95 $85,950
7.500% 82.84 $82,840
8.000% 79.87 $79,870
8.500% 77.04 $77,040
9.000% 74.33 $74,330
9.500% 71.75 $71,750
10.000% 69.28 $69,280
10.500% 66.92 $66,920
11.000% 64.66 $64,660
11.500% 62.51 $62,510
12.000% 60.45 $60,450

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%

Chart

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.

Chart

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.

 

 

1998-2002

Year Total Federal Debt Increase or decrease Reported Deficit Discrepancy
1968 $368,685 $35,085 -$25,161 $9,924
1969 $365,769 -$2,916 $3,242 $326
1970 $380,921 $15,152 -$2,842 $12,310
1971 $408,177 $27,256 -$23,033 $4,223
1972 $435,936 $27,759 -$23,372 $4,387
1973 $466,291 $30,355 -$14,908 $15,447
1974 $483,893 $17,602 -$6,135 $11,467
1975 $541,925 $58,032 -$53,242 $4,790
1976 $628,970 $87,045 -$73,732 $13,313
1977 $706,398 $77,428 -$53,659 $23,769
1978 $776,602 $70,204 -$59,185 $11,019
1979 $829,467 $52,865 -$40,726 $12,139
1980 $909,041 $79,574 -$73,829 $5,745
1981 $994,828 $85,787 -$78,969 $6,818
1982 $1,137,315 $142,487 -$127,977 $14,510
1983 $1,371,660 $234,345 -$207,802 $26,543
1984 $1,564,583 $192,923 -$185,367 $7,556
1985 $1,817,419 $252,836 -$212,307 $40,529
1986 $2,120,503 $303,084 -$221,227 $81,857
1987 $2,345,953 $225,450 -$149,733 $75,717
1988 $2,601,105 $255,152 -$155,182 $99,970
1989 $2,867,802 $266,697 -$152,636 $114,061
1990 $3,206,293 $338,491 -$221,030 $117,461
1991 $3,598,180 $391,887 -$269,240 $122,647
1992 $4,001,787 $403,607 -$290,320 $113,287
1993 $4,351,043 $349,256 -$255,060 $94,196
1994 $4,643,310 $292,267 -$203,180 $89,087
1995 $4,920,584 $277,274 -$163,950 $113,324
1996 $5,181,464 $260,880 -$107,430 $153,450
1997 $5,369,208 $187,744 -$21,890 $165,854
1998 $5,478,192 $108,984 $69,270 $178,254
1999 $5,605,524 $127,332 $125,610 $252,942
2000 $5,628,703 $23,179 $236,240 $259,419
2001 $5,769,885 $141,182 $128,230 $269,412
2002 $6,198,401 $428,516 -$157,750 $270,766
2003 $6,760,016 $561,615 -$377,590 $184,025
2004 $7,354,651 $594,635 -$412,730 $181,905
2005 $7,905,300 $550,649 -$318,350 $232,299
2006 $8,451,354 $546,054 -$248,180 $297,874
2007 $8,950,752 $499,398 -$160,710 $338,688
2008 $9,986,077 $1,035,325 -$458,550 $576,775
2009 $11,875,850 $1,889,773 -$1,412,690 $477,083
2010 $13,528,809 $1,652,959 -$1,294,370 $358,589
2011 $14,764,230 $1,235,421 -$1,299,590 -$64,169
2012 $16,050,920 $1,286,690 -$1,076,570 $210,120
2013 $16,719,430 $668,510 -$679,770 -$11,260
2014 $17,794,520 $1,075,090 -$484,790 $590,300
2015 $18,120,060 $325,540 -$441,960 -$116,420
2016 $19,539,490 $1,419,430 -$584,650 $834,780
2017 $20,205,680 $666,190 -$665,450 $740
2018 $21,462,300 $1,256,620 -$779,140 $477,480
Total $21,128,700 -$13,763,372 $7,365,328

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.

Rate Value
12.00% $43,500
11.000% $47,000
10.000% $50,840
9.000% $55,080
8.000% $59,740
7.000% $64,880
6.000% $70,560
5.000% $76,830
4.000% $83,780
3.000% $91,470
2.000% $100,000
1.000% $109,470
0.000% $120,000
-1.000% $131,720

 

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.

Chart

 

 

 

 

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.

1998-2002

Year Total Federal Debt Increase or decrease Reported Deficit Discrepancy
1968 $368,685 $35,085 -$25,161 $9,924
1969 $365,769 -$2,916 $3,242 $326
1970 $380,921 $15,152 -$2,842 $12,310
1971 $408,177 $27,256 -$23,033 $4,223
1972 $435,936 $27,759 -$23,372 $4,387
1973 $466,291 $30,355 -$14,908 $15,447
1974 $483,893 $17,602 -$6,135 $11,467
1975 $541,925 $58,032 -$53,242 $4,790
1976 $628,970 $87,045 -$73,732 $13,313
1977 $706,398 $77,428 -$53,659 $23,769
1978 $776,602 $70,204 $59,185 $11,019
1979 $829,467 $52,865 -$40,726 $12,139
1980 $909,041 $79,574 -$73,829 $5,745
1981 $994,828 $85,787 -$78,969 $6,818
1982 $1,137,315 $142,487 -$127,977 $14,510
1983 $1,371,660 $234,345 -$207,802 $26,543
1984 $1,564,583 $192,923 -$185,367 $7,556
1985 $1,817,419 $252,836 -$212,307 $40,529
1986 $2,120,503 $303,084 -$221,227 $81,857
1987 $2,345,953 $225,450 -$149,733 $75,717
1988 $2,601,105 $255,152 -$155,182 $99,970
1989 $2,867,802 $266,697 -$152,636 $114,061
1990 $3,206,293 $338,491 -$221,030 $117,461
1991 $3,598,180 $391,887 -$269,240 $122,647
1992 $4,001,787 $403,607 -$290,320 $113,287
1993 $4,351,043 $349,256 -$255,060 $94,196
1994 $4,643,310 $292,267 -$203,180 $89,087
1995 $4,920,584 $277,274 -$163,950 $113,324
1996 $5,181,464 $260,880 -$107,430 $153,450
1997 $5,369,208 $187,744 -$21,890 $165,854
1998 $5,478,192 $108,984 $69,270 $178,254
1999 $5,605,524 $127,332 $125,610 $252,942
2000 $5,628,703 $23,179 $236,240 $259,419
2001 $5,769,885 $141,182 $128,230 $269,412
2002 $6,198,401 $428,516 -$157,750 $270,766
2003 $6,760,016 $561,615 -$377,590 $184,025
2004 $7,354,651 $594,635 -$412,730 $181,905
2005 $7,905,300 $550,649 -$318,350 $232,299
2006 $8,451,354 $546,054 -$248,180 $297,874
2007 $8,950,752 $499,398 -$160,710 $338,688
2008 $9,986,077 $1,035,325 -$458,550 $576,775
2009 $11,875,850 $1,889,773 -$1,412,690 $477,083
2010 $13,528,809 $1,652,959 -$1,294,370 $358,589
2011 $14,764,230 $1,235,421 -$1,299,590 -$64,169
2012 $16,050,920 $1,286,690 -$1,076,570 $210,120
2013 $16,719,430 $668,510 -$679,770 -$11,260
2014 $17,794,520 $1,075,090 -$484,790 $590,300
2015 $18,120,060 $325,540 -$441,960 -$116,420
2016 $19,539,490 $1,419,430 -$584,650 $834,780
2017 $20,205,680 $666,190 -$665,450 $740
2018 $21,462,300 $1,256,620 -$779,140 $477,480
Total $21,128,700 -$13,763,372 $7,365,328

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.

1983 – 2019 chart

Fundamentals 1987, 2000, 2007 to 2019

1987

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.

Chart

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%

Chart

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.

1984-1987 chart

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.

Chart

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.

US Balance of Trade

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.
Chart

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.

Chart

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

Chart

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

to anxiety among institutions, especially pension funds and individual investors, which led to a movement of funds from stocks into bonds.
Thursday 15 October 1987 by the last ahlf hour of trading very heavy selling by portfolio insurers

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.

1 January – 16 October 1987

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.

1 January – 19 October (“Black Monday”) 1987

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.

Chart

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.

Chart

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 –
1988 $330,190,000,000 3.07% $1,353 2.11%
1989 $343,139,000,000 3.92% $1,393 2.96%
1990 $342,113,000,000 -0.30% $1,376 -1.23%
1991 $320,409,000,000 -6.34% $1,272 -7.49%
1992 $348,645,000,000 8.81% $1,368 7.48%
1993 $344,109,000,000 -1.30% $1,333 -2.51%
1994 $336,444,000,000 -2.23% $1,288 -3.43%
1995 $326,560,000,000 -2.94% $1,234 -4.13%
1996 $316,417,000,000 -3.11% $1,181 -4.30%
1997 $325,201,000,000 2.78% $1,199 1.51%
1998 $323,277,000,000 -0.59% $1,177 -1.81%
1999 $333,446,000,000 3.15% $1,200 1.88%
Average $332,495,833,333 0.41% $1,281 -0.75%

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
1988 $2,601,105,000,000 $17,479 $24,684 1.41
1989 $2,867,802,000,000 $18,698 $26,542 1.42
1990 $3,206,293,000,000 $19,641 $29,273 1.49
1991 $3,598,180,000,000 $20,056 $33,182 1.65
1992 $4,001,787,000,000 $21,099 $36,782 1.74
1993 $4,351,043,000,000 $21,738 $39,221 1.8
1994 $4,643,310,000,000 $22,574 $40,592 1.8
1995 $4,920,584,000,000 $23,600 $41,907 1.78
1996 $5,181,464,000,000 $24,762 $43,240 1.75
1997 $5,369,208,000,000 $25,984 $43,673 1.68
1998 $5,478,192,000,000 $27,545 $43,427 1.58
1999 $5,605,524,000,000 $28,647 $43,374 1.51
Increase 115.51% 63.89% 75.72% 7.09%

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

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.

Chart

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%.

Chart

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.

US balance of Trade

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”

Chart

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)

Chart

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.

Chart

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.

Chart

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.

Chart

17 February 2000, the curve was positive, also telling us that US economy and markets were healthy.

Chart

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

Chart

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.

Chart

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.

 

 

Growth in gross domestic product slowed considerably in the third quarter of 2000 to the lowest rate since a contraction in the first quarter of 1992.[4]

 

 

 

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

Chart

 

 

 

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.

Longs
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.

Shorts
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.

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

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.

When it does you’ve just confirmed the beginning of the next bear market. For larger scale charts showing entries and reversal periods see 1988, 2000, 2003, 2007, 2009, and 2019.

 

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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)

2018-2019 chart

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

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)
Starting balance.

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.

1983 through 2019 chart

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

Chart

 

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%.

1968-2007 Chart

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

2008 through 2019

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?

China

Japan

6) Identifying the downturn as it occurs

 

120

Daily

Weekly

Monthly

 

 

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.

 

 

Spreadsheet and all supporting links

7) One trading method that captured the the majority of all major market moves in the S&P from 2000 through 2019.

The instrument we’re trading in this example is the S&P 500 futures contract, if you’re not familiar with this contract see S&P contact specifications & Index educational videos & resources.

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.

# CFD Analysis Page H 2H D W M O
13.01 AAPL Apple Inc H 2H D W M O
13.02 AIG American Int. Group H 2H D W M O
13.03 AMD Adv Micro Devices H 2H D W M O
13.04 AMZN Amazon H 2H D W M O
13.05 AXP American Express H 2H D W M O
13.06 BA Boeing Co. H 2H D W M O
13.07 BAC Bank of America H 2H D W M O
13.08 C Citigroup Inc H 2H D W M O
13.09 CAT Caterpillar Inc H 2H D W M O
13.10 CSCO Cisco Systems Inc H 2H D W M O
13.11 CVX Chevron Corp H 2H D W M O
13.12 DIS Walt Disney Corp. H 2H D W M O
13.13 FB Face Book Inc. H 2H D W M O
13.14 FCHIX Franklin H.I. H 2H D W M O
13.15 GDAXI DAX Index H 2H D W M O
13.16 GE General Electric H 2H D W M O
13.17 GOOGL Alphabet Cl A H 2H D W M O
13.18 HD Home Depot H 2H D W M O
13.19 HPQ Hewlett-Packard Co. H 2H D W M O
13.20 HSI Hang Seng Index H 2H D W M O
13.21 IBM I.B.M. H 2H D W M O
13.22 INTC Intel Corp H 2H D W M O
13.23 J225 Nikkei 225 H 2H D W M O
13.24 JNJ Johnson & Johnson H 2H D W M O
13.25 JPM JP Morgan Chase H 2H D W M O
13.26 KO Coca-Cola Co. H 2H D W M O
13.27 MCD Mcdonald’s Corp H 2H D W M O
13.28 MMM 3M Company H 2H D W M O
13.29 MRK Merck & Company H 2H D W M O
13.30 MSFT Microsoft Corp H 2H D W M O
13.31 NDX Nasdaq 100 H 2H D W M O
13.32 NGAS Natural Gas H 2H D W M O
13.33 ORCL Oracle Corp H 2H D W M O
13.34 PFE Pfizer Inc H 2H D W M O
13.35 PG Procter & Gamble H 2H D W M O
13.36 S&P S&P 500 Index H 2H D W M O
13.37 STOXX50 Euro Stoxx 50 H 2H D W M O
13.38 T AT&T Inc H 2H D W M O
13.39 TRV Travelers Co. H 2H D W M O
13.40 UK100 FTSE 100 H 2H D W M O
13.41 UTX United Technologies H 2H D W M O
13.42 US Crude West Texas Crude H 2H D W M O
13.43 VZ Verizon H 2H D W M O
13.44 WMT Wal-Mart H 2H D W M O
13.45 XAUEUR Gold EUR H 2H D W M O
13.46 XAUUSD Gold USD H 2H D W M O
13.47 XOM Exxon Mobil H 2H D W M O

14) Or try it on any of the other markets we trade, updated every 10 minutes

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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.

1983 through 2019 chart

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.

1983 through 2019 chart

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.

Chart

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.

Source Credit Suisse AllHedge Index (USD)

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.

Chart

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.

January 1995 through July 2009

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.

If you have questions send a message or contact me

Regards,
Peter Knight Advisor

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Disclosure

 

Creating Your Own ATA Portfolio

Procedure

1) Download & open this spreadsheet

2) Enable editing, some operating systems require you to save it as a new file.

3) Cells B3-B-14 provide links to top ATA’s, life of program performance records and full disclosure of trading methodology.

4) The monthly and annual performance for each individual program will be on your right.

5) After you’ve decided on an ATA line up enter the number of units you’d like to trade for each ATA in cells C-3 through C-14.

6) The chart will change  to reflect each individual program’s contribution to the total cumulative performance.

7) Your allocation’s monthly profit or loss will show below the chart, please review the losing months to ensure you’re comfortable with the potential drawdowns.

8) Performance stats lower left

9) Monthly and annual performance for your allocation shows at the bottom.

10) Each individual market’s monthly and total performance will show in cells AM57 through AX57.

2) ATA Basics

Automated Trading Accounts (ATAs) What They Are & How They Work
The ATA Fee Structure 
Defining Overall Risk For Your ATA Account 
Exchanges Traded 
Brokerage Firms 
How Balances Are Guaranteed Plus or Minus Trading Activity 
How To Open An Account

3) Account minimums USD or major currency equivalent

Futures & Forex ATAs, $7,500 to $100,000 (open to all investors)
Stocks & ETF ATAs, $100,000 to $2,500,000 (open to all investors)
CTA & Hedge Funds $250,000 to $10,000,000 (Must be a QEP’s)

How To Open An Account

If you have questions send a message or contact me

Regards,
Peter Knight Advisor

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Disclosure

Trading multiple time periods

Trading multiple time periods objectively

Adds to your winning positions as the trend strengthens
Reduces positions as the trend changes eventually getting you neutral
Reestablishes new positions with the trend
Adds to positions as the new trend strengthens.

Definitions

120 = the trades taken using EMAs on 120 minute bars
Daily = trades taken using EMAs and daily price bars
Weekly = trades taken using EMAs on weekly price bars
Monthly = trades taken using EMAs on monthly price bars

 

 

The 120 EMAs generate a long and we buy 250 contacts

 

 

Daily hits long, buy another 250, you’re now long a total of 500 contracts
Weekly hits long, buy another 250 contracts, net long a total of 750
Monthly hits long, buy another 250, you’re now net long 1,000

Market starts to sell off and you’re long a 1,000

120 hits sell, reverse the 120 from long to short by selling 500 contacts
The first 250 contacts offsets the initial 250 you bought using the 120
At this point you’re long only 750 contacts
The second 250 contracts offsets the 250 you bought using the daily
You’re now net long just 500 contacts

Market continues sell off

The daily hits sell, reverse the daily position selling 500
The first 250 offsets the initial 250 you bought using the weekly
At this point you’re long only 250 contacts
The second 250 sold offsets the 250 you bought using the monthly
You’re now flat, you have no longs or shorts

Market is still selling off

Weekly hits sell
Reverse it by selling 500 contracts
You’re now net short 500 contacts

Monthly hits sell
Reverse it by selling another 500 contracts
You’re now net short 1,000

Short 1,000 Breakdown
250 on the 120
250 on the daily
250 on the weekly
250 on the monthly

For Exchange reporting see this link. download the position limit spreadsheet , you’ll find the levels in vertical column J.

If your trading on your own  holding in excess of 100 contacts make positions are filed on  this link  for the ATAs we run position reporting is automatic.

If you have questions send a message or contact me

Regards,
Peter Knight Advisor

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Disclosure

test on text auto revisions

1) What’s Moving

US Indices Non US Indices
1 Month 1 Month
3 Month 3 Month
This Year This Year
12 Month 12 Month

2) Buy, Sell, Hold Summary

2.1) US Stock Index Futures
2.2) Non US Stock Index Futures

3) Index Analysis, charts & quotes are updated every 10 minutes

# Analysis Page Hour 2 Hour Day Week
Trend
3.01 S&P 500 H 2H D W T
3.02 NASDAQ H 2H D W T
3.03 Dow H 2H D W T
3.04 Russell 2000 H 2H D W T
3.05 Euro Stoxx 50 H 2H D W T
3.06 Euro Stoxx E600 H 2H D W T
3.07 DAX Index H 2H D W T
3.08 CAC 40 H 2H D W T
3.09 Swiss Index H 2H D W T
3.10 Hang Seng H 2H D W T
3.11 Nikkei H 2H D W T
3.12 ASX 200 Index H 2H D W T
3.13 FTSE 100 H 2H D W T

4) The Importance of Trading Long and Short (3:23)

4.01) Full Disclosure of trading Methodology
4.02) All Bull & Bear Markets 1983 to 2018
4.03) Excel Spreadsheet 1927-2018 historical data and inflation adjusted
4.04) U.S. Stock Index futures we trade
4.05) European Stock Index futures we trade
4.06) Asian Stock Index Futures
4.07) Why Trade Futures Instead of ETFs?
4.08) A Cost Comparison – Futures versus ETFs
4.09) Top 100 Exchange Traded Funds (ETFs)

5)_Major/Minor Bull, Bear markets 1983 to 2019

5.01) 1983-2019 chart
5.0
2) January 1983 – August 1987 Bull 139.72 – 337.89 =+141.83%
5.03) August 1987 – October 1987 Bear 337.89 – 216.47 =-35.93%
5.04) August 1987 – August 1989 Bear to recovery (2 years)
5.05) August 1987 – July 1990 Bull 216.47 – 369.78 = +70.82%
5.06) July 1990 October 1990 Correction 369.78 – 294.51 =-20.36%
5.07) July 1990 – February 1991 Correction to recovery (7 months)
5.08) October 1990 – July 1998 Bull 294.51 – 1,190.58 =+304.26%
5.09) July 1998 – October 1998 Correction 1,190.58 – 923.52 =-22.43%
5.10) July 1998 – November 1998 Correction to recovery (4 months)
5.11) October 1998 – March 2000 Bull 923.52 – 1,552.87 =+68.15%
5.12) March 2000 October 2002 Bear 1,52.87 – 768.63 =-50.50%
5.13) March 2000 December 2007 Bear to recovery (7 years 9 months)
5.14) October 2002 – October 2007 Bull 768.63 – 1,576.09 =+105.05%
5.15) October 2007 – March 2009 Bear 1,576.09 – 666.79 =-57.68%
5.16) October 2007- April 2013 Bear to recovery (5 years 6 months)
5.17) March 2009 – 2019 Bull 666.79 – 2,872.87 = +330.87%

6) Educational Resources

General Information on Futures and Futures Options

6.01) Futures Educational Videos (60)
6.02) Futures Options Educational Videos (34)

Stock Index Educational Videos

6.03) What is a Futures contract?
6.04) What is an Equity Index Futures
6.05) About S&P Futures and Contract Specifications
6.06) Definition of Margin
6.07)
The Benefits of Futures Margins
6.08) Fundamentals and Equity Index Futures
6.09)
Who Uses Equity Index Products?

6.10) Why Trade Futures instead of ETFs?
6.11)
Hedging and Risk Management for Equity Index Futures

6.12 Trading Opportunities in Equity Index Futures
6
.13) How to Trade Select Sectors
6.14)
Explaining Call Options (Short and Long)
6.15) Explaining Put Options (Short and Long)
6.16) Trading Options During Economic Events
6.17 Option Collars what they are and the basics of how they work
6.18) Working Example of Collaring a Position
6.19) Equity Index Daily & Final Settlement
6.20) Rolling an Equity Position Using Spreads
6.21) What is Equity Index Basis?
6.22) Equity Index Notional Value and Price
6.23) The Importance of Depth (Volume)
6.24) Equity Intermarket Spreads
6.25) Implied Liquidity in Select Sector Futures
6.26
) Influence of Pricing on the Option for Equity Traders
6.27) Why Options on Futures Gives Added Benefit of Diversifying Risk
6.28) Alpha/Beta and Portable Alpha
6.29) Cash Equitization – Cash Drag in the Cross Hairs
6.30) Transition Management using Stock Index Futures
6.31) Beta Replication and Smart Beta
6.32) Additional Educational Information on Stock Indices

7) ATA summary & account opening procedure

7.01) Automated Trading Accounts (ATA)
7.02)
The ATA Fee Structure
7.03) Defining Overall Risk For Your Account

7.04) Exchanges Traded
7.05) Brokerage Firms
7.06) How Balances Are Guaranteed Plus or Minus Trading
7.07)
How To Open An Account

If you have any questions send a message or contact me

Regards,
Peter Knight Advisor

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Interpreting the U.S. Bond Rally

The US has had an extended and very impressive rally in the prices U.S. Treasury securities.  The 10-year U.S. Treasury has seen its yield move from a recent high of 3.23% in early October 2018, down to 2.22% at the end of May 2019.  One of the most important questions is whether the Treasury rally is signaling that a US recession is imminent.  While we see U.S. real GDP decelerating into the second half of 2019, we do not yet see the US moving into an actual recession in the near future.  If that read is correct, then what is driving the U.S. bond market rally.  Well, there are a variety of interpretations as to why this move occurred.

Figure 1: US Treasury 10-Year Note Yield

Let’s examine a multiplicity of forces impacting the market.  (1) Subdued path of inflation.  (2) Influence of Germany and Japan government bond yields.   (3) Lose-Lose trade war yet lack of panic in U.S. equities.  (4) The unusually twisted shape of the U.S. yield curve.

Subdued Path of Inflation

U.S. inflation is subdued.  Persistently subdued inflation works to lower inflation expectations as well as increase the confidence that inflation risk will remain low for an extended period of time.  What this means is that the spread between the U.S. 10-Year Treasury yield and the historical core (excluding food and energy) inflation rate tends to narrow as more and more market participants accept the narrative that inflation will remain subdued for a long time.

Figure 2: US PCE Inflation Excluding Food and Energy

There are a several reasons that inflation has been subdued since the mid-1990s.  First, prudential regulation has increasingly focused on mitigating systematic financial risk through tight capital requirements for financial enterprises.  The result has been that central bank monetary policy, from zero rates to quantitative easing, does not lead to increased consumer and business lending, and so economic growth is not stimulated, inflation is not encouraged – only asset prices rise and volatility dampened.  Secondly, financial firms are much more proficient in their interest rate risk management than they were in 1970s or 1980s before interest rate futures were widely used.  Improved interest rate risk management in the 1990s and 2000s has meant that for a given small change in short-term interest rates, there is virtually no meaningful impact on financial firms’ earnings, and behavior is not changed.  Third, the Internet Age has brought amazing transparency to prices.  Consumers can comparison shop on their smart phones, and this has shifted pricing power away from businesses and constrained inflation pressures.  Fourth, while the era of globalization may now be going in reverse with the escalating US-China trade war, there is little question that trade growth and globalization has served to keep a lid on consumer prices for decades.  The bottom line, though, is that at every month inflation remains subdued, it provides fuel for lower government bond yields.

Influence of German and Japanese Government Bonds

The Bank of Japan is the king of quantitative easing.  Expanding its purchases of Japanese Government Bonds (JGBs) dramatically since 2013, it has anchored JGB yields near zero.   The European Central Bank (ECB), initially in the aftermath of the Great Recession of 2008-2009, chose to make emergency liquidity loans to the financial sector rather than purchase assets.  This policy changed in 2015, as the ECB embraced quantitative easing, which help drive German Bund yields to converge with JGBs.

Figure 3: 10-Year Government Bond Yields

By contrast, the U.S. Federal Reserve (Fed) was early to quantitative easing and massive asset purchases, but in 2018 the Fed switched gears and started to reduce the size of its balance sheet – quantitative tightening (QT).   We expect the Fed to end its balance sheet shrinkage in 2H/2019.  Moreover, even as the Fed’s balance sheet has shrunk, the Fed has been very careful not to shrink its holdings of longer-term U.S. Treasury securities, even as it allowed its short-term Treasuries and mortgage-backed security holdings to shrink. Thus, the shift to QT had virtually no impact on the long-term Treasury market.

Figure 4: Composition of Federal Reserve Assets

Still, the reality for global fixed income market participants is that U.S. 10-Year Treasuries offer 2.2% more yield than similar maturity German and Japanese bonds, and the exchange rate risk has been relatively modest among the U.S. dollar, euro, and Japanese yen.  Even with a little FX risk, there is a natural and powerful competitive pull from German and Japanese bond markets toward lower U.S. Treasury yields.

Escalating Trade War and U.S. Equities

There is no question that the US-China trade war has entered a new and escalated phase.  Both sides are dug into to what increasingly looks like a lose-lose situation for global economic growth.  The recent trade war developments have halted the upward momentum in U.S. equities.  There has been selling pressure among stocks impacted by the trade war, as well as defensive moves into high-dividend stocks.  What there has not been, at least through the end of May, is any signs of panic selling.  Markets have been orderly and a repeat of the rapid stock price deterioration of Q4/2018 has not occurred.  Our interpretation is that equities are appropriately re-pricing risks associated with the companies most impacted by an escalating trade war, but equity markets are not shifting to a focus on an imminent recession.  We do note that the Q4/2018 near-20% decline in U.S. equities convinced the Fed to stop its lock-step path to higher rates and shift to a policy of keeping rates on hold for 2019.  So, far the Q2/2019 equity pattern is in no way powerful enough to argue for a change in Fed policy or a rate cut.

Figure 5: E-Mini S&P 500

Unusual Shape of the Yield Curve

The U.S. Treasury yield curve has an unusual shape.  Back in early October 2018, just as the equity swoon was getting started, the yield curve had a modestly positive slope, with short-term yields below long-term yields.  Now, at the end of May 2019, the curve is inverted, short yields above long yields from the overnight federal funds rate (at 2.40%) and 3-month T-bills through to the 5-year Treasury Note (at 2.03%).  The 5-year yield is the low point, however, and as maturities increase to 10 years and longer, yields move back to a very modestly positive slope.

Figure 6: US Treasury Yield Curve Shape

When the full yield curve is flat or inverted, history has shown that more equity volatility and a potential recession may lie 12 to 24 months into the future.  Market participants ignore yield curve warnings at their peril.  We have certainly seen more equity volatility.  But does the short-maturity inversion signal a future recession when the long maturities partially disagree?

We would go with the conclusion that the yield curve is signaling that US and global economic growth is decelerating, but at this point forecasting an imminent U.S. recession seems a stretch.  We must point out that when the Q2/2019 U.S. real GDP data is published at the end of July 2019, it will mark this expansion as tying the record for the longest on record.  And the unemployment rate is still below 4%.  The Fed may well be worried, but probably not worried enough to cut rates any time soon.

Bottom Line

  • The Fed is data dependent.
  • A data-dependent Fed will not anticipate economic weakness, not from the trade war, a flat yield curve, a government shutdown or debt ceiling crisis, or any other cause.
  • A data-dependent Fed means the Fed needs to see inflation persist below 1% for a few months or it must observe a recessionary quarter before it will cut rates.
  • If inflation is headed below 1% and/or recession occurs, however, the Fed would not cut rates by 0.25%, we predict it would go full-bore to take the federal funds rate to 1% in just one or two meetings of the Federal Open Market Committee (FOMC), or maybe make one big cut an emergency unscheduled FOMC meeting.  The step-wise path of rate rises is not the pattern for rate decreases.