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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.

1283427950_2yield.thumb.jpg.d2816127a0eaac6fc12aabad756fa033.jpg

 

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@Caseynotes,

You make a valid point. Anyone studying the bond market over a number of years will appreciate your point more. 

To me it does not matter from a trading perspective if there is a recession or not. If there is then I will try and short the strongest trending assets. 

It matters more for me from an investment perspective. What I have done in the past and will do again if we see a full blown recession of gigantic proportions is to invest lump sums once the dust settles as the markets will no doubt climb back up (no guarantee of course) but history tells us this is more likely than not so on balance of probabilities the markets are likely to go back up but I accept it could take longer.

Good counter argument to the norm so well done for that. I don’t know what will happen but you make a good point that for a trader it does not matter especially if you trade on price action and are comfortable both long and short.

👍🏾

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We need CNBC to do another 'Markets in Turmoil' special, pretty much guarantees a rally 😂

see chart below

image.thumb.png.bc9f09b0187e8fdd18de9221328be098.png

 

 

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@Caseynotes,

😁😀

This is a true experience. There was a period when I was shorting the US 500 and shared this trade live with the IG Community. Now that specific trade failed for me as my timing was all wrong. Anyway that is not important but at the same time I was long US as I invest long term in US Smaller Companies through investment funds. A very good childhood friend who works in an investment bank (cannot name here) said they were exiting all equities in their portfolio (this was over a year ago) as the markets were going to crash. I kept investing in US Smaller Companies through pound cost averaging and the US small caps saw some stellar growth in this period with my US Small Cap fund doing very well. So yes I lost the short trade on the S&P 500 which was very small in comparison but won as my longer term investment in the US Small Cap fund performed exceptionally well. Now my friend will have lost out on some fantastic gains as he was heavily influenced by 'market noise' rather than looking at the price action and seeing what they was telling us. 

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. 

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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. 

ro2.jpg.76b66e6ad60e4a88dd7f1c934a43ea59.jpg

 

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@Caseynotes,

Yes that is right. I have seen some calling the recession for the past two to three years! They have been calling it as if it is around the corner. Then when it does not come they move the goal posts via obscure technical analysis. When one challenges it, one is deemed negative or a naysayer. 

Corrections happen large and small. Investors sell investments to take profits. This has been happening since the markets began. Prices go up and down. Prices are bullish and bearish. Of course trading sentiment plays a big part but for me following the price action and letting the price action lead you to a trading decision is key. Trying to wait for the price action to follow your view and then changing the narrative by giving technical reasoning when it does not follow your view in my opinion will lead to missing out on trading opportunities. 

For a sound trader, recessions, should not be feared but welcomed. If one understands how prices react during recessions then one can prepare their trading strategy for this outcome but for when it happens and not before. 

 

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@Caseynotes,

One must remember that on average it can take around 18 months from when the treasury yield curve flips or inverts to the start of a recession. 

People talk about Dr. Copper but another commodity that it is worth keeping an eye on is Lumber. When housing construction begins to drop then that can be one of many indicators to have a look at. Others are inflation, interest rate direction, wage growth, unemployment, etc. There are many well documents indicators which signal a potential recession is around the corner. 

From a trading perspective one should not worry as long as one is comfortable shorting. Those who are not may struggle to consistently make enough profits during a recessionary period. 

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Posted (edited)

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.

ro1.jpg.9682b44478f93997bb0db6c7bedd64db.jpg

Edited by Caseynotes

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@Caseynotes,

Yes you make a valid point. Going short too easily will blow your account. One of the problems with following trend following principles like I do is that the trend does not continue in the direction of the trade, false trend potential, sharp trend reversal, etc. These are all risks that a trader who follows trend following principles faces. Trend following has its flaws which does at times makes shorting tricky hence why I only try to trade the strongest trending assets. Even then trends can reverse when least expected and the trade can move against you. If you set your stop losses too tight then you may be stopped out unnecessarily and if you stop them too wide then you may necessarily take a bigger loss than you needed to. 

Trading is difficult which ever strategy one adopts. There is no 'free lunch' as they say. One has to work hard, put the effort in, have strict discipline in following rules and take emotions out of trading decisions. I accept it is easier said than done but this is where a lot of traders fail in my opinion. Trading during a recessionary period is going to be difficult and tricky as traders will be 'short' specific markets. It is all about entry and exit rules that will help determine the level of success. 

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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.

ro3.jpg.bda1dfde98cba64fbf6b44c51fc4a0f0.jpg

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11 hours ago, Caseynotes said:

It was depressing to watch. 

lol yes it is.  Even more depressing when you get caught up in it.

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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.  :)

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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.

 

image.thumb.png.3bfd57c09082203db8a29453dcdc629a.png

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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).

image.thumb.png.c44f349aef85f97b9aa3c2da5f65b6d6.png

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So what do we know? We know Italy are in a recession. 

We are being told that Germany and Japan are teetering on a potential recession. Growth is stalling in Japan. The US-China trade war is having a negative impact on Germany. The UK could fall into a recession after Brexit potentially sometime in 2020. Japan is a having its own trade war with South Korea. France is hardly fairing any better. 

However when trading one must put this aside and look at the current price action and trade based on current price trending rather than future possibilities as they may or may not occur depending on the decisions of Central Governments around the world. 

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Posted (edited)
Quote

Markets volatile amid trade war confusion

Global Times editor denies that US - China talks took place.

 

This is just a farce now ...

Struggling to see the point in trading any more. 

Edited by dmedin

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@dmedin,

This is nothing new. Media has been reporting one thing or another since for many years now (long time). This is what makes trading interesting and difficult as no one knows what piece of news will be released when. If you ignore all the news and put that to one side and just look at the price action then you may find it easier. This way you will only be making trading decisions based on price action rather than news 'market noise' influencing your decisions. 

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21 hours ago, TrendFollower said:

@Caseynotes,

If you set your stop losses too tight then you may be stopped out unnecessarily and if you stop them too wide then you may necessarily take a bigger loss than you needed to. 

 

This happens to me ALL the time. 

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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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6 hours ago, Caseynotes said:

you may as well go back to coin flipping

😱😁

If only the odds were as good as 50/50!

Yes, putting your stops just above resistance or just below support are the way to do it. 

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@dmedin,

Just think if all traders decided to apply stops using such a methodology then it would be so easy for the trading sharks and large institutions to spot this. It would be so easy for the brokers that these traders are using to spot this.

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All traders are doing this, that's why there are support and resistance levels, the orders show up clearly on a Depth of Market price ladder, the majority of which were placed by large institutional traders.

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Just because large institutional traders are doing it does not mean smaller or novice traders are doing it.

Actually I am sure all traders are not doing it. Just looking on the IG Community allows me to make that inference. 

Yes, I do not doubt that large institutional traders are placing stop losses using support and resistance. Knowing what large institutional traders are doing can give the smaller retail trader an advantage is it can use this information effectively. 

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8 hours ago, Caseynotes said:

the orders show up clearly on a Depth of Market price ladder

 

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

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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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Hedge Funds net leverage in US stocks at multi-year lows but right where some of the decades most powerful rallies began.

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