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Recession Obsession


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We all know what the book says about a yield curve inversion, that a recession will follow 1 - 2 years after and that between the inversion will reverse back, bonds will be sold while stocks enjoy a brief rally before finally rolling over into a recessionary bear market, after all it's happened 7 times before so must be again right. Well not necessarily, previously the inversions have been deep and lasted several months, that hasn't happened yet. Also fore warned is fore armed and we already know the problem is this time, it's Trump trying to get China to play by the rules, oh and debt.

The thing is that the bond market has changed radically in the last decade and longer, look at the long term chart of the 10 year bond yield below, falling steadily since the 1980's, with the 10 year being so low a 2/10 year yield inversion is much more likely under far less economic provocation.

But what about the debt then, well it's clear Modern Monetary Theory (MMT) is becoming a 'thing' whether people call it or not. The Japanese have been doing something like it for years except going the long way round and printing money to buy bonds instead of just printing money.

MMT says that so long as you don't borrow from outside and you keep inflation under control you can print the amount of money you need (see the MMT thread), Japan have been doing it for decades, the UK, US and EU started latter but doing it they are, the problem for the EU is that they have also been borrowing widely from outside.

Central bank bond buying has distorted the bond market making yield inversions more likely, but less likely of an automatic recession to follow. Central banks will continue to print money anyway, the key is to control inflation, owing yourself money can be dealt with, it's owing other people money that's the problem.

How will it all actually pan out, who knows, that's not a trader's concern, an investor might take a different view but they still won't know til it happens whatever 'it' is.

 

Chart 1: Yield dipping below the red line is inversion, the shaded columns are the recession periods that followed.

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Chart 2: The steady decline of the 10 year bond yield since the 1980's.

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Chart 3: The 2 year bond yield retreating from recent highs.

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  • Thought provoking 1
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15 hours ago, TrendFollower said:

The likes of Bloomberg, CNBC et al do have a form of bias which traders need to be careful and aware of. Yes they may have some expert analysts but they cannot predict the future any better than some of us who are trading our real money and spending real time observing price action. 

That's correct and they do influence people, in all the years I've been watching markets on a daily basis there has not been a week go by when someone hasn't called an upcoming recession, whenever the indices correct downward the calls come daily, not least on this forum.

Indices often look a 'bit toppy', it's called 'the wall of worry', technical based traders not understanding the drivers and the nature of indices are forever calling major reversals and routinely get it wrong, traders need to block out 'the noise' and just follow the charts. 

Here's an interesting chart, volume of twitter pessimist sentiment spikes correlate with SPY lows. 

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yes @TrendFollower, there are plenty of long term investors with IG and it's right they should take notice and plan well ahead for any eventuality but traders should be thinking differently and look to be responsive to changes in market conditions. As in my previous post the big indices always look a bit toppy and it's too easy to get in short too soon.

Back in 2016 there was talk of impending recession for most of the year and many new traders blew their accounts continually shorting the market trying to 'catch the big one', the get rich quick trade. It was depressing to watch. 

Here's another interesting chart of S&P seasonal pattern of average return 1990-2018 suggesting uncertainty in the short term before resumption upward.

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Edited by Caseynotes
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So we know via client sentiment as used as a contrarian indicator that retail traders can't be trusted to call the next market move, and as above we see that the media also can't be trusted but what about the Fed, surely they know what's going on - don't they?

Well no actually, in Fed statements an increase of the citations of the words 'risk' and 'uncertainty' tend to precede a rise in the market while increased use of words like 'certain' usually preceded a fall.

If even top of the field professionals can't see into the future you certainly shouldn't be trusting amateur gurus, just read the chart in front of you. The funny thing is that with minimal chart training everyone can see where to trade, it's just doing it that's the hard part, which is why so many are so easily mislead by the more vocal.

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8 hours ago, dmedin said:

Recession or not, the indices look like they are having a downturn to me ... the only question is whether you try to hop on or wait till they reach the bottom and rise back up with them.  :)

While it's true markets can carry momentum it's just as true that they can turn on a dime as we've seen multiple times recently, it's also true they can be carried great distances very fast by sheer panic. But look at the Dow monthly chart below, that is not a bearish chart no matter which way you look at it.

It's easy to see why top pickers would be getting edgy but you simply can't rely on technicals alone, each bear bar in the latest section was started by a Trump tweet called precisely at the highs. Once the new information was assimilated the markets momentum pushed price back up to the highs again each time, the upward momentum exists because of the continuing strong economic data being reported on the US economy, the data needs to change to bearish before the chart will. 

Reminder; one key metric to watch US GDP is released on Thursday.

 

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  • Like 1
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Oops, got screwed again.

Maybe with this kind of volatility it's better not to trade.  The time to get short was around end of July/beginning August, when the MAs went down.  Since then it's just been painful and pointless.  Will wait for the MAs to trend back up again.

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25 minutes ago, dmedin said:

Oops, got screwed again.

Maybe with this kind of volatility it's better not to trade.  The time to get short was around end of July/beginning August, when the MAs went down.  Since then it's just been painful and pointless.  Will wait for the MAs to trend back up again.

The volatility is a good thing and though MAs are of an interest I wouldn't start there. Using Dow as a proxy on the H4 chart the support levels were very clear, 25073 (red) and 25273 (blue).

Never a good idea to short directly into support (or buy directly into resistance).

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1 hour ago, BoJK said:

This happens to me ALL the time. 

Tight stops mean quick and frequent losses.

Looser stops mean it takes longer for the pain to build up.

Either way it's painful.  But with looser stops you are like the frog that slowly gets boiled alive without realizing it.

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2 hours ago, BoJK said:

This happens to me ALL the time. 

 

48 minutes ago, dmedin said:

Tight stops mean quick and frequent losses.

Looser stops mean it takes longer for the pain to build up.

Either way it's painful.  But with looser stops you are like the frog that slowly gets boiled alive without realizing it.

ok, it's going to depend on how you look at the market but the idea is that if you have a trade idea then your stop loss is set where the validation for the trade idea was proved wrong, so in fact most stops should be very tight, it's the trade idea that's probably wrong. You might like the idea of having a massive stop and then sit back and watch price gyrate all over the place but you may as well go back to coin flipping. 

Using the H4 chart above as an example, if trading the range a limit entry order with a tight stop just beyond the support or resistance level would be appropriate going both up or down, if not using a limit order but waiting for the bounce before entry fine but the stop goes in the same place. The point is that the support or resistance will either hold or not, if it doesn't hold you want to be out as soon as possible.

Of course if you took the opposing view and though the levels wont hold then you wouldn't be shorting into support or buying into resistance but rather be waiting for the level to break first.

S/R levels are dominant over MAs, S/R levels represent the likely placement areas of orders and are not just the result of a math sum based on historic averages. 

 

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8 hours ago, TrendFollower said:

Knowing what large institutional traders are doing can give the smaller retail trader an advantage is it can use this information effective

'Knowing' what they are doing gives us the ability to 'hide' behind them.

S/R become more significant the longer the period of time they have been in place, and also the volume that has built up around them ...

I don't know how to pick the 'right' S/R so I just use Fibonacci ratios which usually seem to be a good approximation.

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1 hour ago, dmedin said:

 

I take it IG has this but its use its restricted from the bottom feeding retail clients.

 

1 hour ago, dmedin said:

'Knowing' what they are doing gives us the ability to 'hide' behind them.

S/R become more significant the longer the period of time they have been in place, and also the volume that has built up around them ...

I don't know how to pick the 'right' S/R so I just use Fibonacci ratios which usually seem to be a good approximation.

IG's DOM platform is free to use but you need a cfd account with a min deposit of £1000 (I think).

In fact drawing support and resistance levels is relatively simple and they are usually the site of clusters of resting orders as seen on the DOM platform and they also correlate well with futures options positioning.

You don't need to 'pick' them, you just need to be aware of them and look to see how price reacts at them because they are usually sites of breakouts or reversals.

Intraday I would switch to the daily pivot points calculated by the 'Floor' method as the IG default uses but not on a Monday as the 1 hour Sunday candle distorts. The intraday pivot levels are available at the start of day and often correlate well with the H4 and H1 support resistance levels drawn at end of day. 

 

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Comparison between US and Japan bond and indices markets. 30 year treasury yield and the S&P dividend yield inverting, This yield inversion made the headlines on Wednesday, the graph below emphasises again the long term change in bond markets since the 1980's and the cnbc article linked below admits this latest development could be bullish for stocks as investors seek yield.  

The next chart down shows the Japan dividend yield inversion with the 10 year bond yield back in 2007 and increasing ever since as the bond yields head negative, the initial inversion looks to have sparked a rally in stock market. In the longer term this may well be the graph of the future of US and European bond and dividend yields, a new normal.

The 3rd chart below shows the current US 2's and 10's and the 3 month and 30 year bond yield inversions.

https://www.cnbc.com/2019/08/27/the-30-year-treasury-yield-is-now-yielding-less-than-stocks.html

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Mike Bird  @Birdyword; People make a bigger deal out of dividend yields passing above 10yr bond yields than it deserves

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here's another interesting chart, the Copper/Gold ratio and is in a similar vein to the the chart in the post above. Could we be on the verge of the next big rally?

image.png.43970b6df7abb9652b6f98e0e04c1b97.png

Macro Charts @MacroCharts

Copper/Gold Ratio weekly RSI. All time record low -- one more for the history books. Ratio is correlated with Bond yields, which also plunged to multi-year lows. Could be forming another historic base. Maybe the most contrarian chart ever...

 

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'The next recession is coming, that's for certain!' ...  is not actually telling you very much.

Every man and his dog is predicting a recession, imminent, in 6 months, in 12 months, in 18 months, in 24 months. right.
We know this happens every time there's a downturn in the data but there have actually only been two recessions in the last 20 years. But this time it's different - yes well it always is, but what about the debt, well that's been around like forever, as that great 20th century economist Ronald Regan 🙄  said back in the 1980's "the debt's big enough to take care of itself" Boom Boom.
Ah, but the yield curve inversion, guaranteed that is. But does that really work so well now yields have been decreasing for decades and are going negative across the developed markets, even Alan Greenspan last Thursday said he expected the US yields to go negative in the future. Japan has had negative yields for an age, with such tightly packed spreads is an inversion as meaningful as once was? 
 History shows downturns in the data are more likely to lead to a new stock market rally than a recession and especially so when hedge funds are at minimal holding. The last two recessions we didn't really see coming, y2k and the bubble and bust then the sub prime fiasco (bubble and bust) but this time we know what's causing the data to drop, it's Trump trying to get China to play by the rules, it won't but it could end tomorrow.
Keep an open mind, don't swallow garbage wholesale, wait to see what happens, be equally prepared for a new leg up as for a leg down.

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S&P and momentum - value chart showing the current spike down, from these levels the biggest rallies start plus another look at current hedge fund positioning and the suggestion that in the past they have ended up chasing the market rather than being the wise front runners.

Also keeping an eye on the copper chart and a reminder of the copper gold ratio chart posted above on Sept 4th.

'History shows the biggest spikes were last-minute positioning resets that kick-started *massive* global cyclical rallies (2002, 2009, 2016).'

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  • 4 weeks later...

oh dear, we printed money to lend to ourself and now how are we going to pay ourself back, er... just a thought but are those presses still handy?

whoa's me, we should never have left the gold standard when printed money was backed by gold, now what's it backed by ??  er, well us actually. Printed money is backed by production, people and infrastructure. There needs to be enough money in the system to keep production going but not so much as to cause excess inflation.

That's how it's always worked, people come up with a creative productive idea and the Govt prints money to pay for it, then collects taxes on it forever after. The gold didn't actually do anything. Ah, but gold kept us honest, well inflation can do that just as well.

Modern Monetary Theory, one step closer, Warren Mosler;

 

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  • 4 weeks later...

"The word Recession in this business cycle has become synonymous w/ clickbait amongst Media outlets to get ratings & scaremongering amongst AUM hunters in the Hedge Fund Community, who then get terrible returns / lose lot's of $, because they're still living in Macro era 1997-2007"

AntonKreil @AntonKreil

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On 07/10/2019 at 11:22, Caseynotes said:

Printed money is backed by production, people and infrastructure.

This is actually a very profound point.  Ultimately, the source of all wealth is human labour and the world around us (and the raw materials it provides).  Everything is made from a combination of those two things :D

Edited by dmedin
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