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Some simple and basic 'Fundamental Analysis'

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I wanted to share some simple and basic 'Fundamental Analysis' with regards to my 'Long' Gold and Silver trades and 'Short' S&P 500 trade.

The Gold price is continuing to rise as equities around the world are declining. Gold is priced in USD and US Equities are in 'bear market' territory. US Federal Reserve has raised interest rates by 25 base points. There are a lot of 'risks' at the moment in terms of equities declining, Trump's Trade War with specifically China and monetary policy. These conditions are favourable for Gold going forwards. 

For those who may not be familiar let me explain when a market is in 'bear market' territory. It is when a market has declining by 20% or more from its highs. The biggest worry is any 'recessionary impact' that may come going forwards. A lot of people have obtained cheap credit whilst interest rates have been at all time lows. If interest rates begin to increase then if these people have not managed their risk properly then they could be in trouble as their repayments begin to increase. Business are effected by interest rate increases too so as their loan repayments increase their costs increase which could lead to job cuts.

On top of this major technology stocks have entered into a 'Death Cross' recently. Now for those not familiar with what the 'Death Cross' actually means then it is when a share's 50 day moving average goes below its 200 day moving average. This tends to signal a change in trend from upwards to downwards. I think it could take months or at least the first quarter of 2019 for this bear market to try and bottom if not longer. I have a 'feeling' that this is going to be a enormous downtrend and those who do not short such opportunities are going to miss some exceptional opportunities. These are just my personal thoughts based on my 'gut' and 'instincts'. So please do not take this as 100% likely or it is given. I could just as easily be wrong. 

Now in the past on IG Community traders have posted many threads and posts about 'Buy the Dips'. I would absolutely not buy the dips right now on such indices trending strongly downwards. What I would be looking to do is 'Sell The Rips'. This is the opposite of the buy the dips. During any prices rises during a downtrend one adds to their position and adds to their short position. It is being reported that indications are the more declines are likely to be seen in the weeks and months ahead. It seems the major indexes are producing new lows which gives me the impression that the worst is still to come. What makes it difficult for us traders is that volatility is increasing. This is great for day traders and shorter term traders but for anyone who holds long positions it becomes difficult with the risk of stop losses getting executed. 

The dynamics of the current scenario is fascinating. I never thought I would be 'Long' Gold and yet I am. Risk tolerance is declining and along with it the markets are declining. Now one could infer that the price action of Gold is making it look like a potential safe haven for investors. There is the potential of a weaker dollar which could lead to higher Gold prices. I have openly stated I am not a fan of Gold. However, I saw an opportunity to get in early on what seems to be a trending upwards movement based on price action.

We have the US Government shutdown which seems to be becoming a regular occurrence. For me this creates uncertainty in the market which is going to bad for stock markets and positive for the likes of Gold. When one adds the US Monetary Policy into the mix then one can see why things are unravelling the way they are. 

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Continuing with the fundamental analysis with the US in particular I would like to add that the US dollar has ended 2018 as one of the stronger currencies. It is after all the world's reserve currency. 

Now there is an expectation that the low interest rate period is behind us. One of the biggest issues is the US's national debt which is simply unsustainable on any level. This could rear its ugly head in 2019 and presents a major risk from a fundamental perspective on the markets. 

I shall be keeping a close eye on Bonds and Gilts in 2019 and see the price behaviour of those assets which may well help to give an indication of future price performance on equities. 

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As the country awaits the voting on the Brexit deal it will be rather interesting to see how the FTSE 100 and other UK indices behave as well as the safe haven 'Gold' in tomorrow's session and the overnight session throughout the night. 

 

 

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Well the US Government has ended albeit temporarily the shutdown. The markets which were expected to sharply fall have risen phenomenally, especially the US indices. I tried to short the US indices and clearly got the trades wrong. Right now based on price action one should be trading long as one should never go against the trend regardless of fundamentals, economics, news, etc.

Trends can be extremely powerful and if one trades solely based on fundamentals when there is a disconnect with the price action then it can be extremely dangerous. When you look at the US debt levels, potential interest rate rises in the US, US-China trade war, slowing down of the US economy with GDP figures possibly declining going forwards, potential company earnings declining and the potential unwinding of capital in US equities points towards a falling US stock market. 

The price action is telling us a different narrative right now which could change at any moment so one must follow the price action very carefully. Stock markets are a 'future price discounting mechanism'. So they are telling us what they think is going to happen around six months into the future. A lot of investors and traders forget this point. The key data to look at is the forecasts of say six months and twelve months ahead. What are the data expectations going forwards. 

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The forecasts for the US don't look too bad actually;

Interest rates Q4 2019 -  3%   

GDP Q3 - 4 2019  - 2.4%  to  2%   

Unemployment rate  Q4 2019  -  3.7%   

Dow index forecasts for Dec 2019  range anywhere between   24559 down to 21662 (which is only a revisit of the recent low)   

The current Debt to GDP for the US is historically high at 105.40 (debt was doubled under Obama) but compared to Japan's stonking  253.00 looks relatively tame.   

So certainly the forecasters aren't even looking to a recession let alone a depression.   

But of course forecasts are only forecasts. 

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@Caseynotes,

These forecasts could potentially change as Brexit implications are more clearer. Also countries like India are forecasting GDP of around 7% and Trump promised so much in putting America first that GDP in Q3 from 2.4% to 2% is certainly not what many in the US were expecting. 

I agree it is not actually that bad under the circumstances.

From what I am hearing (in my circle) and my circle could be wrong is that at some point significant capital from especially US equities has to unwind and will shift into another generating better returns and providing higher yield. When this happens which could be a year to two away or may have even began but many don't realise it, US equities could slowly grind lower with large and long rallies along the way distracting the views of many.

It will be interesting to see how the longest government shutdown in US's history affects the forecasts going forwards. I also think there is a fundamental shift of GDP growth from the west now to the east. Asia is fuelling this increase and the next decade I believe will belong to Asia in terms of GDP growth.

For long term investors it is worth bearing this in mind when it comes to portfolio allocation in your investment portfolios. Obviously the growth figures released will either support my view or reject it so please do not just accept my point blindly but let the figures confirm or reject such a notion. 

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The problem with the forecasts is that they are determined by computer modelling and the input data since July 2018 has been skewered by the US/China trade dispute. But the dispute could be brought to an end at very short notice, the computer models can't forecast if or when that might happen so don't, (nor can I).

The trade dispute is affecting the forecasting of most of the economic data sets for most countries and all the forecasts will need to be rewritten if the dispute is suddenly resolved.

True that the current forecast for the US is now lower that expected before the trade dispute became embedded and demonstrates how forecasts can easily get left behind by subsequent events (see first graph).  

Interesting contrasting graphs. The first is the old US GDP growth rate forecast before the trade dispute.

The second is a new China GDP growth rate forecast during the trade dispute.

image.png.9373cde6c15093bbed03bbd1ba530c47.png

image.png.ed8b3ceb7ad8dd5bc887d0eb131f6567.png

 

 

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@Caseynotes,

Those charts are very interesting.

What I am unsure about is whether Brexit is going to affect the rest of the world? If so then by how much? It possibly may not have any detrimental effect to other major economies around the world but this is the part which I am finding it extremely difficult to quantify even on an assumptive basis using predictive modelling. 

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@TrendFollower  that is truly a difficult one, who even knows what Brexit is going to be, currently it looks like a deal meaning Brexit in name only and not actually leaving the EU at all.

The other question is, if there is a true Brexit, who will it hurt the most and my guess is the EU. They are not going to be able to carry on as before after losing one of the top 3 economies. No wonder they are doing everything possible to block it.

What impact would France and Germany going into recession have on other major economies around the world?

Annual GDP growth rate forecasts for Germany, France and UK (in that order). 

image.png.70e6827e39728d44c3007bb8770ff7b7.png

image.png.9aeea380de1f37a466736a8471b271ed.png

image.png.55975641b0103a86fe10631ca8ed289e.png

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The UK is making a strong push in improving its trading relationship with China. It should be trading far more with China and India based on their growth performance and potential going forwards. Also the sheer size of their markets means the potential is there and the UK should be striving to provide goods and services to China and India as they are going to be serious players in the next 10-20 years if not a lot sooner.

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How will the current Brexit scenario and risks associated with the March 2019 deadline affect the markets?

How will the current delay in US-China trade talks and also the March 2019 deadline before the US puts up tariffs affect the markets?

These are two key questions facing both investors and traders at the moment. 

Usually the markets move prior to the 'big event' in both advance and anticipation. 

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Brexit has been delayed and the media are reporting positive trade talks between US-China.

This has created the atmosphere for bearish price action.

At the same time major indices have been bullish which again has called for a bearish environment. 

 

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The German economy is estimated to be worth around $4.2 trillion in 2019. It is the forth largest economy in the world after the US, China and Japan. It is also larger than the next two EU countries combined in France and the UK. 

It is being reported that the German economy has returned to growth. Now unemployment still stands at around 3.2% and inflation is currently around the 2% mark so there is still plenty of work to do. 

The USA and China are both important export markets for Germany so the trade talks between US-China are having an impact. If reports are to be believed then the USA is also said to be considering raising tariffs against European car imports, which is of course a major export of the German economy.

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I posted the following on my Potential Gold trade thread but thought it sat nicely here too.

 

I had a 'gut feeling' that Trump and Kim Jong-un's get together over the weekend would cause Gold to continue falling. 

It is like the US controls the market behaviour through the release of news exactly at the time it wants to. Trump is very proud of the US stock market performance and I would call it 'indirect manipulation' or 'silent manipulation' which is not obvious to the normal public around the world. 

The US decides when it wants to arrange meetings and release certain information via media channels. The traders and general public have no control over the news flow and when it will be released so the US Government have the edge in terms of calling the market direction. They know what news will be released in the future. 

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Regardless of whether you like him or not, no one can argue that whilst Trump as been president of the US, its major stock markets have been making new highs. They have not crumbled and crashed under his leadership. 

The rest of the world with the likes of Russia and China are fed up with the reserve currency being US Dollars and the US (one country in the world) having so much power and control in the world. I think in the years to come there will be a shift away from the US Dollar (less reliance on it) and the US's power will diminish as countries like Russia, India, China, Germany and France all try and insert their own influence over the world. 

Trump understands that to get re-elected he needs to be able to demonstrate the he was good for business and how the stock market thrived under his tenure. If Trump gets re-elected then one must start thinking about what impact this will have on US stock markets. This is why though our brain may be telling us that a large drop in the US stock markets is looming, markets are future discounting mechanisms that look six months into the future and reflect the picture they see through current price levels. 

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A lot has been made of the US Fed Reserve cutting rates yesterday.

One must understand that economic conditions can strengthen or weaken and the US Fed Reserve has a role in taking appropriate economic action when necessary. There is no given rule that when a country is increasing interest rates, it occasionally cannot decrease them if economic conditions warrant it necessary and vice versa.

If growth is indeed slowing or showing signs of weakness in the US then does it not make sense to reduce interest rates? It has been increasing them for a while now so it certainly has more leeway and room to manoeuvre. I think this has been the first rate cut for around 11 years so not bad under the circumstances.

The US-China trade war has not helped and this is a specific problem which if it warrants an interest rate cut to help it continue on its growth trajectory then it actually makes economic sense.

If Trump had his own way then he would want further more aggressive US interest rate cuts but he is looking at it from a business friendly perspective rather than an economic perspective. Trump wants to join the aggressive interest rate cutting party that China and the EU have demonstrated over the previous years. 

The key thing to have come out of yesterday is the end of qualitative easing. This will be good for the US in the longer term.

The US has a 2% inflation target which is being set by the Central Bank but only time will tell if the US needs to cut interest rates further or go back to increasing them. A key indicator for the health of the US economy are Bonds as they have been providing a warning that the health is not as good as it seems going forwards. 

Some were calling for a 50 point cut in US interest rates. This may have given the markets a worry that things are worse than they seem and this could have spooked equity markets and may have been seen as too aggressive at this time. 

 

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US Dollar - The World's Reserve Currency:

The US Dollar as the world's reserve currency is an issue which causes mix reactions and thoughts. When the US Dollar  became the reserve currency there was no Euro or Chinese Renminbi. Since their introduction it has eaten into the US Dollar's world dominance and as a result has led to it declining from the 70%-80% range to the 60% range.

If one remembers, the UK Pound Sterling, once was the world's reserve currency but it now only accounts for around 4% at the moment. So things can change and it is not a given that the US Dollar will remain the world's reserve currency forever. It will have to earn that right which it may well do. 

The US Dollar’s share of global central bank reserves hit a 5-year low, according to the International Monetary Fund.

Now is this the beginning of a significant change here? Is the US, the world superpower it once was? There is no doubt it is the mightiest country in the world at this moment in time in terms of economics but imagine if the US Dollar lost its reserve currency status. This would have a large impact on the economics within the US. 

I do not envisage the US losing its status anytime soon but if things continue to get worse and other countries find ways to conduct international transactions / transfers / payments without the need to hold US Dollars, and an alternative arises then who knows. 

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    • Where can I find a list of the US ETFs which are tradable with IG? I can't receive market data for those via the API (same as for stocks), correct?
    • US Dollar - The World's Reserve Currency: The US Dollar as the world's reserve currency is an issue which causes mix reactions and thoughts. When the US Dollar  became the reserve currency there was no Euro or Chinese Renminbi. Since their introduction it has eaten into the US Dollar's world dominance and as a result has led to it declining from the 70%-80% range to the 60% range. If one remembers, the UK Pound Sterling, once was the world's reserve currency but it now only accounts for around 4% at the moment. So things can change and it is not a given that the US Dollar will remain the world's reserve currency forever. It will have to earn that right which it may well do.  The US Dollar’s share of global central bank reserves hit a 5-year low, according to the International Monetary Fund. Now is this the beginning of a significant change here? Is the US, the world superpower it once was? There is no doubt it is the mightiest country in the world at this moment in time in terms of economics but imagine if the US Dollar lost its reserve currency status. This would have a large impact on the economics within the US.  I do not envisage the US losing its status anytime soon but if things continue to get worse and other countries find ways to conduct international transactions / transfers / payments without the need to hold US Dollars, and an alternative arises then who knows. 
    • Going back to my FTSE analysis I see things as follows: 2 scenarios present themselves, other than fresh ATHs that is: 1) the move down to the turn on Thursday was a wave 1 (blue) off a larger scale wave 2 (purple) that should retrace, maybe in a complex fashion with a lot of whip saw price action maybe not, let's see; 2) the recent rally and drop to a new low was a 1-2 (red), which indicates a much stronger leg down is immanent. The #2 scenario would only be valid if price holds below the previous high (circa 7300).  I favour the #1 scenario. There was PMD on the 4H chart at wave 1 (blue), which suggests this is a turning point.  Also the 4H chart shows a 1-5 wave down to the 1 blue, which would be motive and suggests a trend change to the bearish side. There was strong NMD at wave 2 (Purple) which is consistent with a large scale retrace move. Just as with the US large caps, after the stop and turn up there was a sharp retrace drop to the Fib 76/78% zone before the current rally.  As the FTSE was in out of hours at the end of the week this market has not rallied as hard as the US markets.  Also we may yet see fresh ATHs on US large caps while the FTSE100 only puts in a counter trend rally. If we do see fresh ATHs on US large caps and only a retrace on FTSE and probably Dax and Nikkei as well then comparing these markets will be instructive for calling that top on US large caps.  We may, alternatively, see only a retrace on US large caps too if the top of the market in already in. Conclusion: we can anticipate a bullish period on all major indices BUT should guard against a quick reversal on FTSE 100 that would set up scenario #2.  Either way this market looks to have topped out so the coming months though to the Autumn will be critical to deciding things on all indices, and likely quite a few other markets. I am Long the FTSE 100, coincident with my Dow Longs and will swing this up for now but my bearish bias for the long term will keep we watchful for a break down of this rally and I will not be pyramiding this one, far too risky until things are resolved.
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