The end of the US stock market is nearing

there was absolutely no need to over-inflate the value of the US and the global stock market in general to such a degree... 350% rise in the major indices since reaching the bottom in January 2009 is just ridiculous and it must be fully corrected by dropping back to those levels... although it is likely to overshoot on the downside as usual thus even making reaching sub 5000 on the DJIA possible as well...

I'd like to invite discussion on ways us traders can profit when this event comes. Shorting the stock indices outright (many FX brokers offer CFDs for these) is an obvious one, though there are probably a number of better ways. Any ideas, guys?

Here's my contribution: During the GFC in the fall of 2008 especially, but extending into 2009, the markets were hammered with shocks every few days (I'm talking about the FX markets specifically here, but all markets were affected). Every few days some really bad news would be released, sending prices plummeting 100 to 300 pips. The next day, the markets decided that this was an over-reaction and prices would shoot back up. Only to be followed by another news shock in a day or two, and that pattern kept repeating, up-down-up-down-up-down. These moves did not begin abruptly, the markets would dither about for five to fifteen minutes before deciding on a direction, but once a trend was established it kept going straight for a couple of hours. All I had to do was be prepared to trade at 8:30 NY time (when most big news is released), watch the M1 charts for the next 15 minutes or so until it was clear what direction the market had decided on, and then jump aboard the train (that's where the handle "Trainman" comes from, it has nothing to do with boxcars and locomotives). 20% account growth per day, easy-peasy.

The 3mo to 10y curve is already inverted.

Yes, but this is "unrealistic" - see the10y-3y.

Sixer

Can you offer a link to where you get your charts? Tx.

The last one is regularly updated here:

https://www.merkinvestments.com/research/

Sixer

I believe, because it's true.

I'm quite sure that because of the inevitable panic in the markets the trading on the exchanges will be stopped, interrupted and postponed numerous times... thus the drop can be delayed... the governments can invent and enforce new rules and regulations during that period affecting our abilities to benefit on such a great opportunity fully and properly....

Agreed. A 1987-style crash isn't going to happen due to the various circuit-breaker rules that the exchanges have put in place. So don't be looking to make your fortune in a single day. But opportunities still abound.

I used to trade commodity indices. In the 2000s commodities went on a long term up trend. Then post-GFC the commodities indices severely slid back for several months, before finally halting and turning higher again. Such a move was dead easy to predict. Something similar could likely be seen again.

BTC and Gold unexpected moves that happened the past 2 months made me concern about what the is going on with people so hardly pushing other investment safe heaven "currencies" and "commodities" that are not controlled by any nation/goverment are booming so early. Feels like some "smart" money are going into these things to be ready before the recession or economical crash occurs.

Technically speaking we are getting these sort of short term US bullish traps that reminds everything is fine. Weirdly Trump wants dollar weaker , but why? Putting Trade wars aside and good economical data obviously.

My call that this year will be people getting into stocks very late and getting caught of with recession but we can't have it this year. It will probably push all equities and indexes up to trap up people thinking it's bullish.

Conclusion: You gotta be ready for what's coming for. Forex usually don't get hit by reccesions or economical crisis/crashes that hard comparing to any other markets. Better use your portfolio into other markets to make a dime if shit turns around and you have no saved/black money around.

Hi Igrok,
What level of S&P will yoy considera a strong sell?
Thanks

i agree that SP is due for a drop.

But not before new highs.

My opinion is that we will see a temporary high in the 3300/3400 area, followed by a drop to 3200/ 250, last high above 3400 and below or around 3500.
Then drop below 3250, sideways and test of previous high (3300/3400).

From there it will be an autum/winter almost continous drop to 2500/2600

To understand take any chart of dow or sp in 1987...

The viscosity of oil allows it to be dragged along with equities as they continue their surge into nose-bleed altitudes. Amazing performance in equities as the sheep, the lemmings, and the stupid push us ever closer to Catastropia, the time and place where it all ends.

WTI H4 bounced off of EMA20 again, this time at ~59.9. Supply worries can perhaps explain its surge. Must be the same for equities: supply worries, a shortage of equities. We need more equities to stave off catastrophe! Look, look: pigs can fly!

Cass Freight Index negative for 7th month, signaling economic contraction:

https://imageproxy.themaven.net/http...sUKx8aT-Sj6GTQ

To understand how and when stock prices are likely to drop, it is informative to consider how they got to current nosebleed heights.

The biggest class of holders of stocks are institutions such as pension funds. These funds also have large holdings of treasury bonds. They are not interested in speculating, security of assets is their number one concern. However, they do have specific targets for annual growth rates which must be met. When interest rates on bonds drop by a lot, the annual growth target cannot be met by holding bonds so the fund managers start moving their holdings over to the stock market. Stock returns are higher but at the cost of higher risk. After the GFC the Fed became rather obsequious toward the stock market, offering "forward guidance" and various other reassurances, signaling that the Fed was prepared to do whatever was necessary to prevent the stock market from dropping (see https://moneyweek.com/glossary/bernanke-put/). These actions gave fund managers the reassurances they needed to put a greater percentage of their holdings in stocks, thus pushing the price of stocks higher.

When the cost of borrowing becomes cheap enough, hedge funds and aggressive investors see a further opportunity for profit: borrow money at a low annual rate and invest it in the stock market at a higher rate of return, pocketing the difference. And so stocks get bid up further until the return on investing "on margin" is no longer attractive. Thus stock market indices tend to track the reciprocal of interest rates: falling interest rates --> rising stock indices and vice versa.

So this explains why stock prices are so high at present -- it is a consequence of the extremely accommodative monetary policy held by the Fed and other central banks since the GFC. And that gives us a good bellwether of what is likely to cause stocks to go down again: rising interest rates. So now the Fed have painted themselves into a corner. So many investors are now so heavily margined that even a minor increase in interest rates would cause a liquidity crisis and force large amounts of stock to be liquidated. Then as the first wave of liquidations pushes stocks lower it also forces the next tier of investors to have to liquidate, like falling dominoes. In December 2018 the mere expectation that the Fed was going to bump up the interest rate a fraction of a percent caused the stock indices to tank. So now the Fed's hands are tied, they can't put rates back up to more normal levels (around 6% per annum) without causing the very market crash that they sought to avert. And at current low rates the Fed has less capacity than usual to respond to future recessions by easing rates. Central banks in other countries are in even more precarious situations.

So don't expect the Fed to be jacking rates any time soon. They may try to gingerly inch the rates a wee bit higher, but as soon as they see stock markets go into spasms they will back off real quick. There is even talk of further easing. However, although the Fed can influence interest rates, they don't have absolute control over them. There are multiple events playing out right now that could cause interest rates to soar higher regardless of anything that the Fed could do to stop it.

One of these is the current administration's hostile trade relations with China, Mexico, Europe, etc. While the administration focuses on their trade deficits, a hidden consequence of this might be the loss of their ability to sell US bonds at low interest rates. To see how this works, consider US trade deficit with China as an example. Americans give $660 Billion annually to China for their goods and services, and China gives the US $241 Billion annually for their goods and services (source https://www.thebalance.com/trade-deficit-by-county-3306264). What happens to the $419 Billion that China receives but does not spend in the US? It uses those funds to buy US government bonds. So as long as China is happy to keep accepting US dollars and converting them to bonds, the US government benefits by being able to fund deficit spending cheaply. The US administration is currently spitting in the eye of every major trading partner around the world. 39% of US government debt is held by foreign governments. If they lose these buyers (or worse, if the foreign holders of bonds take measures to sell their existing holdings) the US government would have to drastically increase the interest rate offered on their bonds to find enough buyers.

There are other events happening but this post is already too long. To get an advance insight to when the bear market will begin, watch gov't bond prices. Watch for news announcements that China, Germany etc are no longer buying US bonds. And of course watch the stock index charts with your favorite technical analysis tools. You will see it coming from a long way off if you are paying attention.

nice observation... though from my opinion it's not very productive to consider today's fundamentals and project them into the future... apparently in order to inflict maximum damage the drop must take place quite unexpectedly for the majority of the market participants... thus it's quite unlikely to be foreseen through routine technical or fundamental analysis by everyone and his dog... especially in advance... the crash will take place on the problem that should appear just out of thin air...

Yes, of course the shock that triggers panic selling will be something nobody expected or predicted. But as you have previously mentioned, there are "circuit breaker" rules in the stock exchanges to prevent a 1987-style all-out panic sell. And the Fed will try to keep things propped up, etc etc. These things mean that a one day crash is not likely to happen. Events will get drawn out over days or months.

By keeping an eye on the fundamentals (and the technicals) we can determine when stocks are ripe for a fall, and we can estimate how successful central banks will be at intercepting the fall. Meanwhile, there will be plenty of up-and-down price movement for traders to get in on.

Equity indices and options will not be constrained, or not as much as the equity markets, but indices and options trading might not get seriously ahead of the equities unless panic is strong and contagious. I expect to be using index futures, tempered by the extend of chaos in pricing. The imposition of circuit breakers might make that trading easier because of slower declines.

I was caught with gold futures longs in '80 when panic selling drove the futures limit down for a few painful and costly days. I was too much of a newbie to have an Exit Plan B ready to go. Well, that's how we learn.

Amen, brother!